IEA Issues Grim Forecast for Crude Oil, But There are Short-Term Opportunities

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The International Energy Agency (IEA) released its monthly oil market report this week on Thursday, November 10th. In its report, the agency said that Crude oil markets could continue in a surplus if OPEC fails to cut production noting that increasing production from exporters could lead to “relentless” supply growth.

Publishing some stats, the EIA noted that world oil demand for the fourth quarter 2016 is expected at 97.08 million barrels per day, which slightly higher from Q3’s oil demand at 96.91 million barrels. The report said that world oil output was 0.8 million bpd from a year ago with OPEC supply offsetting the declines from non-OPEC production.

For the month of October, the agency said that OPEC crude output rose by 230k bpd to 33.83 million bpd on recovery in production from Nigeria and Libya while oil production from Iraq touched an all-time high.

IEA, World Oil Demand, Q4 2016: 96.91 million bpd
IEA, World Oil Demand, Q4 2016: 96.91 million bpd

Crude oil supply from OPEC continued to increase at a steady pace, with supply reaching 33.51 million bpd during the Q3 of 2016.

OPEC Crude Oil Supply, Q2 2016: 33.51 million bpd
OPEC Crude Oil Supply, Q2 2016: 33.51 million bpd

The IEA said that demand growth for 2016 was unchanged at 1.2 million bpd and said that consumption would increase at the same pace next year.

Pressure mounts on OPEC’s November 30th meeting

OPEC leaders are expected to meeting Vienna on 30 November which is nearly two months after an informal accord to cut production was agreed upon in Algiers.

“Whatever the outcome, the Vienna meeting will have a major impact on the eventual – and oft-postponed – rebalancing of the oil market,” the IEA report said.

OPEC had announced back then, that it would maintain a production ceiling between 32.5 and 33.0 million bpd which also includes bringing on board some non-OPEC oil producers as well. Russia has been endorsing this view. Still, the agreement is yet to be formalized to make the Algiers agreement a reality. Oil markets are likely to react strongly to the November 30 OPEC meeting with the markets likely to rebalance itself in the process.

Non-OPEC production, according to the IEA’s report is expected to rise 500k bpd next year, following a 900k decline this year. Most importantly, the IEA’s report suggests that despite a deal to cut oil production, non-OPEC suppliers could make up for the difference.

The IEA warned that 2017 could be another year of supply with growth staying nearly the same as 2016.

Crude oil could be targeting $49

Crude oil futures contracts (CLZ6) for December delivery closed yesterday at $44.28 a barrel. Oil managed to weather the uncertainty from the US elections this week although price at one point fell to as six straight as $43.08 a barrel. The current consolidation above $44.00 handle comes after oil prices fell sharply for nearly six-straight sessions in late October.

CLZ6: Price consolidating above support
CLZ6: Price consolidating above support

Support has been firmly established near the $44.00 and $43.85 region, which is likely to see oil prices move to the upside, but not ruling out another retest of the support level ahead of the rally. The OPEC meeting is due on November 30th and ahead of the event and as the weeks progresses, expect to see more lobbying among OPEC members which could keep prices volatile in the near term. However, any positive chatter could see the bullish sentiment in Crude oil build up which could help lift prices to the $49 target.

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