Only an unrestrained optimist would find the IEA report as anything else but downbeat. The Agency went so far as to say that to the question of could the oil price go lower “the answer is an emphatic yes. It could go lower.” The IEA’s January report was not encouraging really on any of the main fundamental factors of supply,demand or inventories. Perhaps the best that can be said on the inventory front is that the IEA expects stocks to rise “only” another 285 million barrels in 2016 or 0.8 mbd following a net notional build of 1.0 billion barrels during 2014/2015 or around 1.4 mbd. So the rate of stock build diminishes. We still build stocks,although the brunt of the inventory build will be in the first half when the call on OPEC crude is expected to be around 31.2 mbd. Factoring in say a 0.4 mbd Iranian increase to OPECs fourth quarter production of 32.3 mbd would yield an OPEC production level of 32.7 mbd and an ugly surplus of 1.7 mbd for 1H 2016. Mercifully the call for OPEC crude in 2H 2016 is estimated to be 32.4 mbd or a level that at least would move the market somewhat closer to balance. The moving closer to balance part assumes no growth in net non-Iranian OPEC production nor for that matter no growth in Iranian production in 2H2016. (Possible) Interestingly the IEA (see table below courtesy of Reuters) says that non-OPEC production will decline by 0.6 mbd in 2016. But looking at it from a half yearly perspective non-OPEC output decreases by 0.9 mbd from 2H 2015 to 1H2016 and then INCREASES by 0.3 mbd from 1H2016 to 2H2016. That may prove to be quite difficult given the global pricing pressures faced by producers. In fact it would not be at all surprising to see non-OPEC output continuing to fall into 2H2016. If this is the case it is possible that stocks could actually begin to draw sometime later in the 2H2016. Perhaps a bullish float in the IEA’s bearish 2016 parade.
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