COLUMN-Crude spreads remain firm in the face of "massive oversupply": Kemp
By John Kemp
(Reuters) - The oil market was massively oversupplied in the second quarter and remains so today, the International Energy Agency (IEA) wrote in its latest monthly oil market report.
"The market's ability to absorb that oversupply is unlikely to last. Onshore storage space is limited. So is the tanker fleet. New refineries do not get built every day. Something has to give," the agency warned starkly.
If so, someone forgot to tell the futures markets, where timespreads have remained firm and give no indication storage might be running out (link.reuters.com/zyt25w).
Brent and WTI futures imply the market is willing to pay less than 45 cents per barrel per month to finance and store crude on average over the next half-year, down from more than $1 at times between January and March.
According to the IEA, global crude oil stocks should have risen by a massive 3.3 million barrels per day between April and June given the reported imbalance between supply and demand.
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Strong gasoline demand in the United States, plus refinery start ups and increased oil in transit, could all go some way to explain why prices are higher and stocks lower than expected.
But more than 100 million barrels have disappeared into the "miscellaneous to balance" line in the agency's market accounts, which is an awful lot of oil to lose in the statistical system.
WEAKNESS AHEAD
The agency thinks the sources of support cannot last so the market will have to continue rebalancing in 2016.
It forecasts non-OPEC production will remain flat in 2016, after rising 2.4 million barrels per day (bpd) in 2014 and 1 million bpd in 2015.
But that may require a further fall in prices to force the necessary slowdown in shale and non-shale production. "The bottom of the market may still be ahead," the agency warned.
Given the enormous amount of crude that has gone unaccounted for in the first half of 2015, some scepticism is justified.
If the agency is right, though, crude prices will have to fall further to force a further slowdown in non-OPEC production. Price weakness would be concentrated in the near term, causing the time spreads to soften.
So far, there has not been much sign of renewed softening in the spreads. In fact, the market has moved in the opposite direction.
The discount for Brent delivered in September compared with December 2015 has actually narrowed from almost $2 per barrel on June 22 to less than $1.40 currently (link.reuters.com/fav25w).
If the IEA's forecast is to be believed, however, and many analysts share the same view, then the time spreads should weaken again.
Goldman Sachs forecast further falls in spot prices by October and said "evidence of a growing market surplus should weigh on timespreads going forward" in a research note published on July 8.
The alternative view is that fuel demand will continue to grow strongly, especially after the recent drop in spot prices, while the growth in shale output will continue to stall or even reverse in the later part of the year.
The spreads are set to become a key battleground between contending views about how far the rebalancing of the oil market still has to run. (Editing by Susan Thomas)
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UPDATE 1-Oil may have further to fall due to oversupply - IEA
Dmitry Zhdannikov and Christopher Johnson
ReutersLONDON, July 10 (Reuters) -
Oil prices are set to come under further pressure from easing global demand and an expanding glut of crude while a rebalancing of the markets may last well into next year, the West's Energy watchdog said on Friday.
The International Energy Agency (IEA) said it expected global demand growth to slow next year to 1.2 million barrels per day (bpd) from 1.4 million this year - far less than needed to balance stubbornly growing non-OPEC and OPEC supply.
"The bottom of the market may still be ahead," the IEA said in its monthly report.
"The rebalancing that began when oil markets set off on an initial 60 percent price drop a year ago has yet to run its course. Recent developments suggest that the process will extend well into 2016."
"The oil market was massively oversupplied in the second quarter of 2015, and remains so today. It is equally clear that the market's ability to absorb that oversupply is unlikely to last. Onshore storage space is limited. So is the tanker fleet ... Something has to give," it said.
The global glut arose from a steep spike in U.S. oil supply on the back of the shale revolution and OPEC's decision not to reduce output but rather to fight for market share with rival producers.
But the fall in prices to $50-$60 per barrel in recent months from as high as $115 a year ago has yet to depress North American supply.
"The expected timing of the rebalancing has shifted a bit, but the story line has not changed. The supply response to lower prices is on the way," the IEA said, adding it may take another price drop for a full supply response to unfold.
"Cost savings, efficiency gains and producer hedging have let light tight oil producers defy expectations until now, but growth ground to a halt in May and will likely stay there through mid-2016," it said.
U.S. supply grew by 1.0 million bpd in the first five months of 2015, down from 1.8 million in 2014, according to the IEA.
"Total U.S. supply will keep growing through 2016, but much more slowly than in 2014, and thanks to natural gas liquids and new deepwater plays rather than onshore crude supply," it said.
Non-OPEC supply as a whole, after expanding by a massive 2.4 million bpd in 2014, looks on track to slow to growth of 1 million bpd in 2015 and stay flat in 2016, the IEA said.
Among other bearish signals, the IEA said world oil demand growth appeared to have peaked in the first quarter of 2015 at 1.8 million bpd and would continue to ease throughout the rest of this year and into next.
That means the need for OPEC's oil will stand at 30.3 million bpd next year, up 1 million bpd on 2015, but still a whopping 1.4 million bpd below current OPEC production.
"And the group is not slowing down," the IEA said. "On the contrary, its core Middle East producers are pumping at record rates and the outlook for Iraqi capacity growth - accounting for most projected OPEC expansions - keeps improving."
(Editing by Dale Hudson)