Global oil glut set to worsen, says IEA

The global oil glut is larger than previously thought and the risk of prices falling further has increased, the International Energy Agency has said.

In its monthly report, the IEA warned that the recent respite was likely to be a “false dawn” and market conditions were weaker than the agency believed when it predicted last month the world could drown in supply.

The agency issued its gloomy commentary as Goldman Sachs predicted further volatile price swings and said oil could fall to less than $20 a barrel as global storage capacity runs out.

The price of oil has risen since it tumbled to a 13-year low in January. After falling below $28 a barrel, Brent crude climbed to more than $35 at the end of last month, though that was less than a third of the $115 peak in summer 2014.

The IEA said renewed optimism about the oil price was overdone because stocks were increasing faster than predicted. The agency, which advises industralised countries, said this was because:

• a deal between Opec and other oil producing countries to cut production is unlikely
• with Iran increasing production in preparation for the lifting of sanctions, Opec’s production could rise as strongly this year as in 2015
• there is little prospect falling prices encouraging a pick-up in the rate of demand for oil
• the US dollar is likely to remain strong, limiting the scope for falls in the cost of imported oil
• the predicted large fall in US shale production is taking a long time to materialise

The IEA said global oil stocks were likely to build by 2m barrels a day in the first quarter of 2016 and 1.5m barrels a day in the second quarter, with stocks continuing to rise in the second half of the year.

The Paris-based agency said: “We suggest that the surplus of supply over demand in the early part of 2016 is even greater than we said in last month’s oil market report. If these numbers prove to be accurate, and with the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term. In these conditions the short-term risk to the downside has increased.”

Some analysts have said oil could sink to as low as $10 a barrel before traders decide the price has fallen far enough. The IEA said this view could prove to be too fevered but that there were few reasons for optimism.

Goldman Sachs’s head of commodities research, Jack Currie, said more price gyrations were ahead for oil and that the price of crude could drop below $20.

With storage exhausted in some places, prices may have to drop low enough to halt crude output that can no longer be stockpiled, Currie told Bloomberg News.

“Once you breach storage capacity, prices have to spike below cash costs because you have to shut in production almost immediately,” Currie said. He predicted volatility would increase and said he “wouldn’t be surprised if this market goes into the teens”.

Oil’s recent rise was driven by hopes that Opec might do a deal with Russia to cut production. Opec, led by Saudi Arabia, has kept pumping oil to protect its share of the global market while attempting to make production unviable for US shale producers.

The IEA said: “Persistent speculation about a deal between Opec and leading non-Opec producers to cut output appears to be just that: speculation. It is Opec’s business whether or not it makes output cuts either alone or in concert with other producers but the likelihood of coordinated cuts is very low,.”

The agency trimmed its forecast for 2016 demand growth, which now stands at 1.17m barrels a day after hitting a five-year high of 1.6m in 2015.

Global demand for oil is increasing but it has not been enough to absorb the amount of crude left over from weakening Chinese demand. Unwanted oil has been put into storage, creating record global stockpiles of more than 3bn barrels. The IEA said last month that holding surplus oil in tankers at sea might be necessary as storage space on land becomes scarce.