April 15, 2012
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IEA, OPEC Warn Of Crude Oversupply

IEA and OPEC warn that $100/bbl Brent is more realistic. Both OPEC and the IEA yesterday updated their oil supply and demand forecasts for 2012 and while the estimates are different, both organizations had the same message – the market is currently oversupplied and the current price of Brent is not justified on fundamentals.

OPEC and the IEA have spent the past month trying to push that same message in an effort to try to force the price of crude lower to a level that is more comfortable for both producers and consumers. The producers, in particular the moderate OPEC countries led by Saudi Arabia, are fearful of a repeat of 2008, when the oil price was pushed to a record by speculative traders and then collapsed uncontrollably. The consumers are fearful that rising energy costs may derail the fragile global economic recovery. As the data in the table below shows, if OPEC continues to produce at the March rate, then the oversupply may average over 2.0 mln bpd. That is the basis of their warning that the current price is unsustainable.

The Iran-UN talks today will have a price impact. They both estimate that the current price of Brent has a risk premium of approximately $20/bbl. The next assessment of that premium will come today when Iran and the UN meet to discuss the nuclear program and the sanctions timeline. If Iran is seen to make any concessions, then we are more likely to see Brent slide back to $115/bbl, while an intransigent position will keep the risk premium close to current levels for longer. Iran produced an average of 3.39 mln bpd in March. The complete unknown is what that figure will fall to by end 2Q12 if the full embargo is imposed.


The oil market is oversupplied by 2 mln bbl each day. For 2012, the IEA estimates that global demand will average 89.9 mln bpd, i.e. an increase of 800,000 bbl, or 0.9% over the 2011 average. OPEC estimates that demand will average 88.6 mln bbl. They use slightly differing methodologies, as OPEC’s lower estimate is still 1.0% higher than its calculation for last year’s average. The IEA forecast unchanged oil demand in the US, EU and throughout the OECD. Critical to its forecast demand growth is China, where demand is expected to rise to 10 mln bpd from 9.5 mln bpd, and other developing economies. OPEC countries produced 31.2 mln bpd in March, a three-year high. Libyan production recovered by another 125,000 bpd, when a flat number had been expected. Iranian production fell 65,000 bpd to 3.39 mln bpd against its previous output of almost 4.0 mln bpd.

Copyright 2012, Chris Weafer, Troika Dialogue All rights reserved.


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