The International Energy Agency (IEA) thinks the global oil market could “drown in oversupply.” The body issued that dire warning after Iran’s state-owned oil company was ordered to increase output by 500,000 barrels per day. The market has already had a dour 2016 as traders anticipated the lifting of Western sanctions on Iran, and now that that day has finally arrived, Brent crude is down below $29 per barrel with America’s WTI crude trading another $.50 lower. And in a new report, the IEA doesn’t see things improving very much from here. The FT reports:
In a stark assessment of the challenges facing the global oil industry, the International Energy Agency warned on Tuesday of an overhang of at least 1m barrels a day for a third consecutive year in 2016.
Production outside the Opec cartel would decline this year, the IEA said. But that would be offset by slower demand growth and higher production from Iran now that sanctions linked to its nuclear programme had been lifted.
“Unless something changes, the oil market could drown in oversupply,” the wealthy nations’ energy watchdog said in its closely watched monthly oil market report.
The International Monetary Fund (IMF, to add to our alphabet soup of international bodies) recently had some potentially encouraging news for the global economy as it forecast faster growth rates this year than in 2015. That pick-up could help alleviate the current glut of crude from the demand side, but it’s not clear that it will be enough to counteract burgeoning supplies, especially as OPEC members continue to compete for market share by keeping production up (and Iran redoubles those efforts post-sanctions).
Tehran is going to hope to get output back up to pre-sanctions levels (and even beyond, if you believe the Iranian oil minister) as quickly as possible, and it hopes to nearly double production by the end of the decade. That won’t be easy, however, as a number of logistical hurdles stand in the way of a smooth ramp-up: The country’s biggest oil tanker operator has been blacklisted since 2012 and will need to regain certifications to deliver crude cargoes to foreign ports. Analysts expect Iran might be capable of boosting production by as much as 800,000 barrels per day this year, but they see the petrostate’s aspirations of quickly returning to pre-sanctions levels as something of a pipe dream.
But while the exact amount of Iranian crude ready to come online remains unclear, we do know one thing: The world is about to get an oil supply boost at a time when no one (besides the Iranians, of course) particularly wants it. We haven’t seen oil’s price floor, yet.