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IEA sees no oil supercycle as supplies remain plentiful

Offshore oil rig

Oil markets aren’t on the verge of a new price supercycle as plentiful supplies mean any concerns of a shortfall are misguided, the International Energy Agency said.

Crude rallied to a 14-month high last week after Saudi Arabia and its allies stunned traders with plans to keep a tight grip on output. Wall Street banks such as Goldman Sachs Group Inc. have called the beginning of a bull market as demand outstrips supply.

“Our data and analysis suggest otherwise,” the Paris-based IEA said in its monthly report. “There is more than enough oil in tanks and under the ground to keep global oil markets adequately supplied.”

The Organization of Petroleum Exporting Countries and its allies held 9.3 million barrels-a-day of spare production capacity last month as a result of cutbacks made during the pandemic, which could be quickly deployed if markets become tight, the IEA said.

Furthermore, oil inventories in developed countries stood at a “lofty” 110 million barrels above last year’s levels as of January, and can be readily tapped as needed, according to the agency.

“Oil inventories still look ample compared with historical levels,” said the IEA, which advises most major economies. “On top of the stock cushion, a hefty amount of spare production capacity has built up as a result of OPEC+ supply curbs.”

The 23-nation coalition had been widely expected to add about 1.5 million barrels a day in April, but instead chose to keep production mostly steady.

The IEA’s relaxed attitude to OPEC+’s shock decision may seem surprising. Even before the Saudis and their partners announced their move, the agency said that stockpiles were plunging “very, very sharply.”

Oil Prices

Brent crude futures surpassed $70 a barrel last week for the first time in more than a year, and were a little below $69 on Wednesday. Citigroup Inc. has warned the international benchmark may exceed $80 over the next few months because of the cartel’s “aggressive” output strategy.

If OPEC+ doesn’t go ahead with scheduled supply increases in coming months, the IEA’s data indicate that inventory declines in the second half of the year will be steeper.

OPEC’s 13 members pumped an average of 24.75 million barrels a day in February, the agency estimates. By the fourth quarter, they’ll need to provide 29.3 million a day in order to keep world markets in balance.

“The prospect of stronger demand and continued OPEC+ production restraint point to a sharp decline in inventories during the second half of the year,” it said.

World oil demand proved stronger than expected at the start of the year, “boosted by colder weather and improved industrial activity in the U.S. and elsewhere,” according to the report.

The longer-term picture isn’t so robust.

In a separate report also released Wednesday, the IEA said that world oil demand won’t fully recover to pre-virus levels of about 100 million barrels a day until 2023. And beyond that, growth in consumption will lack its previous vigor as remote-working becomes entrenched, and as governments shift away from fossil fuels.

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