The International Energy Agency (IEA) and OPEC have reaffirmed their clash over supply to the world oil market with differing monthly reports on the state of oil markets and predictions over future energy demand.
Most immediately, the IEA believes the “call” on oil produced by OPEC in the third quarter of 2011 will total 31.3 million barrels per day (bpd), while OPEC economists state it will be 1.3 million barrels a day lower at 30 million bpd, nearly the size of Libya’s pre-conflict production level.
The IEA has also strongly defended their decision to bring 60 million additional barrels of oil to market this month, accusing its critics of trying to “have their cake and eat it”.
The IEA’s decision to release oil from its member countries’ strategic oil reserves – with half coming from the US – intended to compensate for what it described as “a string of supply-side outage over and above” the loss of 1.5 million bpd of light sweet Libyan crude oil.
However, since an initial dip, oil prices have strengthened sufficiently to wipe out the effect of the IEA’s actions. As a result, Reuters is reporting that IEA members Italy and Germany have come out against any similar further action by the IEA.
The IEA is expected to confer with its member countries by July 23 to decide whether to draw further on emergency oil stocks after its June 23 announcement of a 60 million-barrel release, according to a Reuters report.
In its précis of international oil markets, the IEA said “[T]he market ledger this month looks slightly tighter than a month ago. Our balances for first-half 2011 [1H2011] show demand continuing to run ahead of supply, if a little less rapidly than in 2H10”.
“Major producers have recognized that demand for their oil is rising, with the seasonal uptick in 3Q11 refinery runs, and more generally as economic growth and short-term fuel substitution keep global and emerging market demand growth robust,” IEA continued. “We welcome rising OPEC volumes seen in June (30.03 mbpd output), but the market needs still more oil for 3Q.”
“This backdrop is simply a more vivid version of the one underpinning the IEA action, which commenced on 23 June. Member governments agreed to release 60 million barrels of strategic stocks for an initial 30 days, amid an ongoing disruption to light-sweet Libyan oil supplies, the anticipated rise in 3Q11 refiner and end-user demand and a likely hiatus before incremental OPEC barrels reach the market. Much ink has been spilt subsequently suggesting that the IEA action comes three months too late, depletes emergency stockpiles and has failed to reduce rampant crude and motor fuel prices. However, we feel compelled to point out that critics cannot have their cake and eat it too.”
The IEA gave an analysis of the impact of Saudi’s additional production, estimating that the Kingdom raised production volumes “significantly” last month.
“There is a significant increase from Saudi in June, and probably in July too,” Nobuo Tanaka said on the sidelines of a meeting at the European Parliament, Dow Jones Newswires reported.
The IEA estimate that about half of the Kingdom’s extra output since the failed OPEC meeting on 8 June – 350,000 bpd – will have entered the international market, mainly for Asian buyers.
However, as previously reported, the appetite for Saudi crude in Asia may be weaker than hoped as prices are not yet sufficiently competitive to dislodge orders from domestic reserves. As a result, Saudi’s ability to pump enough oil and sell it to key markets cheaply enough to lower prices is in doubt.
The IEA report also states that Saudi Arabia’s gulf allies with spare capacity, Kuwait and the United Arab Emirates, also boosted their output last month by the modest totals of 50,000 bpd and 80,000 bpd respectively.
However, the IEA noted that total OPEC production, including Iraq, of 30 million bpd remained “well short” of the anticipated “call” on the cartel’s crude of 31.3m bpd in the third quarter of this year. As a result, supplies are likely to tighten, putting renewed pressure on oil prices.
Meanwhile, economists at OPEC have revised their growth and oil demand forecasts for 2012 downward, as a result of increased concern over the economic recovery of advanced economies. The report is more sanguine on supply imbalances than the IEA analysis.
“With the winding down of government-led stimulus, risks to the forecast for global economic growth have expanded in 2012. Austerity measures, combined with high levels of both debt and unemployment, are likely to dent the fragile recovery in major OECD countries,” said the OPEC monthly report.
However, immediate demand is judged to increase OPEC has raised its estimate of demand for its oil by 100,000 barrels a day (bpd), strengthening the immediate case for lifting the group’s production ceiling, though significantly below the IEA estimate. “The demand for OPEC crude in 2011 is estimated at 30.0 million bpd, around 0.1 million bpd higher than in the previous report”.
Iran’s caretaker Oil Minister and current head of OPEC, Mohammad Ali Abadi, has used the IEA measure to claim no further OPEC output rise is necessary, telling Iran’s state-backed Mehr news agency “currently, there are 60 million extra barrels of oil,” and as a result “there is no economic, technical, or emergency reason that OPEC [needs to] increase oil output”.
According to OPEC, world oil demand is forecast to grow by 1.36 million bpd in 2011, slightly lower than in their June report, as the unsteady global economy has added risks to the forecast. In 2012, global oil demand is expected to grow at a slightly lower 1.32 million bpd.
The report acknowledges the damaging effect of persistently high oil prices: “Should higher international oil prices persist, or should further setbacks in the OECD economies occur, then it might impose a stronger reverse elasticity on oil demand, putting more weight on the downside risk,” the report states. “This risk might be translated into a reduction of current growth by 200,000 bpd.”
The OPEC Reference Basket moved within a large range of $102-114/b in June, but on average fell for the second consecutive month to stand at $109.04/b, down 90¢ from the previous month. Nevertheless, when compared with a year ago, the OPEC pumping 26.9 million bpd last month, a 600,000 bpd increase over the previous month.
