The prospect of Iranian crude oil flooding the market and Saudi Arabia pumping at near-record levels could delay a recovery in an oil market slammed by a historic price collapse, the International Energy Agency said Wednesday.
The IEA—which tracks oil data for western countries—and others have predicted that the world’s glut of oil would fall in line with demand starting from the second half of 2015, when American producers are thought to begin cutting back production due to low prices.
But the IEA said Wednesday that the Organization of the Petroleum Exporting Countries, led by Saudi Arabia, had throttled production up to 31 million barrels a day in March, more than a million barrels above its agreed ceiling—possibly to lock in customers before sanctions are lifted on Iran.
Even with the IEA predicting slower growth in U.S. production, with shale from North Dakota’s Bakken field declining as soon as next month, it may not be enough to spur a recovery as soon as some forecast.
“Recent developments thus may call into question past expectations that supply and demand responses would tighten the market from midyear on,” the Paris-based IEA said, adding “the market rebalancing may still be in its early stage.”
The report comes after three months of Brent crude—the global benchmark—trading between $50 and $60, roughly half its level in the summer of 2014. The swoon was caused by weakening demand in China and elsewhere because of slower economic growth and a booming American supply of oil thanks to hydraulic fracturing of shale formations.
Globally, supply was still outstripping demand in March, the IEA said, but oil prices rose Wednesday morning in London trading on the IEA’s forecast that demand was rising while North American supplies could be slowing down.
The IEA trimmed its prediction for U.S. crude oil growth by 50,000 barrels a day to 550,000 barrels a day in 2015. Growth estimates for North American production including Canada in the second half were trimmed by 160,000 barrels a day.
Overall, U.S. crude production was 9.2 million barrels a day in March, and stockpiles of that oil continued to soar, reaching a record of nearly 498 million barrels by the end of the month.
The IEA noted that demand was picking up, revising its demand growth estimate for 2015 up by 90,000 barrels a day to 93.6 million barrels a day—a gain of 1.1 million barrels a day on the year. The change was down to cold weather causing a greater need for fuel to heat homes, offices and other buildings in western countries.
The IEA said the gain was a notable acceleration on last year’s 700,000 barrels a day growth. But it could also be a “temporary aberration.” Other pockets of demand may not be sustainable, the IEA said, as a fair amount of oil being bought is going into storage for later use.
“Oil product markets have proved unexpectedly strong with the U.S. and Europe showing strength not witnessed for over a year,” Sanford C. Bernstein said in a note Wednesday.
The question hanging over the industry for the past few months has been Iran and how quickly it could ramp up production if it strikes a deal by the end of June that lifts western sanctions. The country’s leaders have pledged to increase exports by as much as 1 million barrels a day.
“[A]n increase in Iranian exports has become a real possibility,” the IEA said, and may have encouraged OPEC to “hike supply and stake out market share ahead of Iran’s potential return.”
The report’s conclusion that a market recovery could be delayed appeared at odds with recent statements from the IEA’s chief economist, Fatih Birol, who said in an interview on Monday that it would take time for Iran’s oil to affect the market.
OPEC’s output rose by 890,000 barrels a day in March to a near two-year high of 31.02 million a day a day, as Saudi Arabia pushed output to record levels and supplies recovered in Iraq and Libya, the report said.
Crude oil supplies in the kingdom, the world’s largest exporter and OPEC’s de facto leader, rose by 390,000 barrels a day in March to an average 10.01 million barrels, the highest level since September 2013, the IEA said.
The IEA said preliminary data suggest that March’s output surge, the biggest monthly gain since June 2011, signal that OPEC production may rise further in April.
“Saudi Arabia will also probably go even more than before for market share before the full return of Iran,” said Olivier Jakob, the managing director and editor of Petromatrix. “Overall this should translate in more OPEC supply in the second half, right when U.S. production could start to feel the impact of the lower utilization of drilling rigs.”
By Summer Said