IEA again looks to OPEC to balance 2014 market

August 12, 2014 | Commodities & Oilprice

London, United Kingdom | – The International Energy Agency on Tuesday cut its oil demand growth forecast for 2014 for a number of reasons, not the least of which is a weaker global economic outlook than previously thought and lower oil supplies in the second quarter.

But even though the world won’t need as much oil this year as IEA earlier thought, that doesn’t mean it won’t need more crude from OPEC.

And that could be a bit of a problem given that OPEC likely will have to depend on stable supplies from countries like Libya and Iraq to reach what the IEA sees as the call for the remainder of 2014.

In its latest monthly oil report, IEA raised the call on OPEC by a combined 400,000 b/d for the third and fourth quarters to 30.8 million b/d. This compares with previous forecasts of 30.7 b/d and 30.5 million b/d, respectively. For 2015, the call has been raised by 100,000 b/d to 29.9 million b/d.

OPEC provided the lion’s share of the world’s output growth in July, raising its output by 300,000 b/d to 30.44 million b/d, IEA said. “Global supply was up 230,000 b/d in July to 93 million b/d, with higher OPEC output offsetting slightly lower non-OPEC supply,” the agency said.

But IEA warned that there is an “ominous” gathering of geopolitical clouds in OPEC countries.

The Sunni insurgency in Iraq has so far caused next to no disruption to oil supplies. The loss of the Baiji refinery to Islamic State fighters meant Iraq produced less oil in July than it did in June, but otherwise operations in the south of Iraq continue as normal.

And apart from a couple of small fields being shut in, oil production in the northern region of Kurdistan is also continuing as normal.

In Libya, things are looking up too. Exports have resumed from the port of Ras Lanuf and that should free up storage and allow fields to ramp up production.

The head of Austria’s OMV, Gerhard Roiss, looked very pleased to announce on Tuesday that the company had started lifting cargoes from Libya again. But as ever, there is no guarantee that Libya’s fragile oil recovery will hold.

But with oil prices at nine-month lows, the risks represented by Iraq and Libya do not seem to be of concern to the market.

“While the situation across these key producer countries remains more at risk than ever, the market appears confident that OPEC can deliver the production increase needed from it to meet rising demand expected in the second half of the year,” IEA said.

In fact, OPEC’s crude supply in July hit a five-month high, as a boost from Saudi Arabia to 10 million b/d and a tentative recovery in Libyan output more than offset losses in Iraq, Iran and Nigeria.

Saudi Arabia’s output in July was the highest since September. “Production rose 230,000 b/d from June levels partly due to increased domestic consumption,” IEA said.

Riyadh typically boosts supply in the summer to meet higher domestic demand for crude to fuel power plants. Saudi supplies to the market, which include sales from storage, were reported at 9.66 million b/d in July, down from 9.75 million b/d in June.

So, with the market well supplied — with an oil glut even reported in the Atlantic basin — much attention has been focused on future demand growth.

IEA said it had cut its global oil demand growth forecast compared with its previous monthly report by about 300,000 b/d to 1 million b/d.

It said there were two “key, somewhat related” factors that prompted it to revise down its demand growth estimates.

“Firstly, demand growth in Q2, at 700,000 b/d, fell to its lowest level since Q1 2012. Secondly, the global macroeconomic outlook has been downgraded, with the International Monetary Fund taking three-tenths of a percentage point off its 2014 global GDP growth forecast, to 3.4%,” it said.

IEA also sees lower demand growth in Russia as “additional sanctions trigger weaker economic activity dampening future oil use.”

Although BP has warned that Russian sanctions could impact its business, oil services giant Schlumberger became the first major oil company to say the sanctions were having a material impact on its Russian operations.

“The sanctions are placing some restrictions on the engagement of certain people and equipment in our Russian operations which in the short term will have an impact on operational efficiency and costs in Russia,” Schlumberger said Tuesday. “The financial impact of the sanctions in the third quarter is limited, and is currently estimated to be up to $0.03 of earnings per share,” it said.