IEA On Price of Oil: "It Could Go Lower"

With Brent and West Texas Intermediate (WTI) crude benchmarks both dropping below $30, many traders and members of the oil and gas industry are asking whether prices can keep falling – and the answer may be yes.

“In a scenario whereby Iran adds 600 kb/d to the market by mid-year and other [OPEC] members maintain current output, global oil supply could exceed demand by 1.5 mb/d in the first half of 2016,” the International Energy Agency said in its latest report Monday. “Unless something changes, the oil market could drown in over-supply. So the answer to our question is an emphatic yes. It could go lower.”

The agency blamed a mild winter in the northern hemisphere and weak economic growth in developing economies for low demand, and the expansion of production supply by 2.6 mb/d in 2015, leaving a widening gap that has been going into storage for some time.

While growth in supply has eased in recent months, Iran will add 300-500 kb/d of oil to the market by April, the agency said.

The weakest price performers have been sour crudes, with the Dubai price for Middle Eastern sour grades down $2 to $6 below Brent.

But there is good news for shipping firms. “In percentage terms, fuel oil spot prices softened the most amongst products after posting declines of more than 20% on persistent oversupply. Accordingly, bunker prices sank to their lowest levels since 2003 in all main transport hubs,” said the IEA. Additionally the price spread between diesel and HSFO has narrowed.

For tankers, earnings were stable, except for VLCCs, which outperformed - especially on one route. “The larger vessel class closed 2015 in style on the Middle East Gulf to Asia route where rates reached $28.12 /t for December, the highest since May 2008. Increased activity ahead of the holiday season added to already strong underlying demand . . . rates eased in early January as temporary factors faded but they are still high.”

“VLCCs owners saw exceptional earnings in 2015: extra volumes from the OPEC Gulf producers provided ample demand, while tanking bunker costs further improved economics. Collapsing crude prices fed through into bunker fuel costs which fell below 2008 levels, even falling to close to $100/t in Rotterdam.”

The other use of tankers – as storage rather than transportation – may not take off soon, the IEA says. With supply in excess of demand for several years, the global inventory has risen by about one billion barrels, and the IEA suggests the addition of another 285 mb of capacity needed through the end of this year. While floating storage may become economical if not enough shoreside tanks are built to take up the unused stock, the addition of 230 mb of tanks is expected this year, and forward prices are not high enough to make it look profitable. The IEA does not expect it to become a popular trading strategy as it did in 2010.

The IEA's monthly assessments are available here.