Drowning in a Sea of Oil

January 19th, 2016 7:03 am | by John Jansen |

Via the WSJ:
By Summer Said
Updated Jan. 19, 2016 5:30 a.m. ET

Oil prices could fall further this year as the market faces an “enormous strain” on its ability to absorb new supplies from producers such as Iran, a top world energy monitor said Tuesday.

“The oil market faces the prospect of a third successive year when supply will exceed demand by 1 million barrels per day and there will be enormous strain on the ability of the oil system to absorb it efficiently,” said the International Energy Agency in its first monthly report of the year.

The oil markets could be left with a surplus of 1.5 million barrels a day in the first half of 2016, and “unless something changes, the oil market could drown in oversupply,” it said.

Crude oil prices have plunged over the last 18 months on vast new oil supplies from inside and outside the Organization of the Petroleum Exporting Countries. On Monday Brent crude touched its lowest level since 2003 .

The low price of crude has seen oil companies laying off thousands of workers and cutting their capital spending. A report by energy consultancy Wood Mackenzie published on Thursday found oil companies had delayed making decisions on 68 major projects world-wide last year. This accounts for some 27 billion barrels of oil and equivalent natural-gas volumes, the report said, and brings total industry-wide deferred spending for 2015 to $380 billion.

Total SA Chief Executive Patrick Pouyanné on Tuesday said the French oil major is likely to report a 20% fall in profit for 2015 due to the collapse in oil prices.

The IEA said Iran could add around 300,000 barrels a day of additional crude by the end of the first quarter, and that the return of Iranian crude to the global market will inevitably and largely offset the 600,000 barrels a day drop that is expected in supplies from producers outside OPEC.

Iranian officials have said the country was preparing to increase production by 500,000 barrels a day.

Global inventories, which rose by a notional 1 billion barrels in 2014–2015, will see a further build of 285 million barrels in 2016, which will put storage infrastructure under pressure despite significant capacity expansions .

The IEA, which advises developed countries on energy policy, maintained its expectation for global oil demand growth this year at 1.2 million barrels a day, down from 1.8 million barrels a day in 2015 it anticipated in December

The unseasonably mild winter saw global oil demand growth fall to a one-year low of 1 million barrels a day in the fourth quarter of last year, down from a near five-year high of 2.1 million barrels in the third quarter.

Supplies from OPEC fell by 90,000 barrels a day in December to 32.28 million barrels a day due to lower production from Iraq and Saudi Arabia, the report said, adding that OPEC has effectively been pumping at will since 2014.

Output from OPEC countries is now 1.06 million barrels a day higher than the same period of last year, a major factor in oil prices falling below $30 a barrel

Iranian output rose in December by 40,000 barrels to its highest level since June 2012, the report said.

The IEA cut its forecast for 2016 OPEC crude oil demand by 300,000 barrels a day to 31.7 million barrels per day due to slightly weaker demand growth.

Supplies from outside OPEC, which proved “resilient” for most of last year, shrank on an annual basis in December for the first time since September 2012.

In total, global oil supply grew by 2.6 million barrels a day in 2015 following similar large gains of 2.4 million barrels a day in 2014.

Write to Summer Said at summer.said@wsj.com

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