Oil prices may have passed their lowest point as shrinking supplies outside OPEC and disruptions inside the group erode the global surplus, the International Energy Agency said.
Production outside the Organization of Petroleum Exporting Countries will decline by 750,000 barrels a day this year, or 150,000 barrels a day more than estimated last month, the agency said. Markets are also being supported by output losses in Iraq and Nigeria, and as Iran restores production more slowly than planned following the end of international sanctions, it said.
“There are signs that prices might have bottomed out,” the Paris-based adviser to 29 countries said in its monthly market report on Friday. “For prices there may be light at the end of what has been a long, dark tunnel” as market forces are “working their magic and higher-cost producers are cutting output.”
Oil prices have recovered 50% from the 12-year lows reached in January as U.S. shale production retreats and as some OPEC members led by Saudi Arabia reached a tentative accord with Russia to maintain output at current levels. This “freeze” deal, while currently supporting prices, is unlikely to have a substantial impact on markets in the first half of the year, the IEA said.
The agency’s view on prices is a shift from last month’s report, in which it said that crude could sink further as the market remained “awash in oil.” Brent futures traded at about $40 a barrel in London on Friday.
The outlook for the balance of supply against demand in the first half is “essentially unchanged” from last month, the IEA said. World oil consumption will increase by 1.2 million barrels a day, helping to reduce the global surplus from 1.7 million barrels a day in the first half to 200,000 a day in the last six months of the year. Last month, IEA projected the second-half surplus would be 300,000 a day. The agency repeated that it could lower the demand estimate as the price recovery curbs U.S. appetite for gasoline.
Inventories in the developed world contracted last month for the first time in a year from the “comfortable” levels recorded in January, according to the report.
The return of Iran after January’s nuclear agreement lifted sanctions on its oil trade “has been less dramatic than the Iranians said it would be” and further recovery will be “gradual,” the agency said. While the OPEC member vowed to restore 500,000 barrels a day as soon as sanctions ended, it instead boosted output by 220,000 barrels a day in February to 3.22 million, the highest in four years.
Production from OPEC’s 13 members slipped by 90,000 barrels a day to 32.61 million a day in February as the increases in Iran were countered by declines in Iraq, Nigeria and the United Arab Emirates. OPEC is still pumping 700,000 barrels a day more than the average amount required from the group this year, the IEA’s data shows.
About 600,000 barrels of Iraq’s exports have been halted by the closure of its northern export pipeline, while the suspension of Nigeria’s shipments of the Forcados grade — amounting to 250,000 barrels a day — “may be in place for some time.”
U.S. oil production will decline by 530,000 barrels a day this year as the price rout takes its toll on investment and drilling, the IEA said. The agency also lowered its supply outlook for Brazil and Colombia.
“Without an increase in demand expectations high cost oil suppliers will continue to bear the brunt of the market-clearing process,” the agency said. “It is clear that the current direction of travel is the correct one, although with a long way to go.”