Opec’s relentless production late in 2016 is to blame for a jump in stockpiles for the first time in six months and a backlog of unused oil, the International Energy Agency said on Wednesday.
Commercial stockpiles in industrialized nations rose in January for the first time in six months by 48m barrels, or around 1.5m barrels a day, to above 3bn barrels, the IEA said in its monthly market report.
Before the agreement to curb output was reached in Vienna late last year, production between September and November surged by 580,000 barrels a day.
Exports from these countries moved into storage and points to why US stocks hit record levels last week, the IEA said.
“The market is still dealing with a vast amount of past supply, which will take time to work its way through the system,” the Paris based body said.
“We have a big backlog of unabsorbed crude oil.”
At the same time the amount of oil in the US is rising from increasing imports, a drop in crude being processed by refineries and the country’s shale drillers pumping more.
Oil prices traded within a tight band for the first two months of the year, as Opec and big producers such as Russia curbed supplies as part of the production cut deal. The agreement aims to reduce global stockpiles to their five year average.
But prices have dropped by 10 per cent over the past week as concerns rose about excess inventories and rising production from countries outside of the cartel.
“The market needs time for the full impact of the big supply cuts under the output reduction agreements to be felt,” the IEA said.
Opec producers have achieved almost full compliance with the deal to cut 1.2m b/d, although Saudi Arabia has delivered the majority of oil output cuts. IEA numbers show a small increase in February output from the kingdom.
Non-Opec countries such as Russia have only reached 38 per cent compliance.
Opec crude supply at 32m b/d is a drop of 320,000 b/d from the prior year, although February saw a small monthly increase.
Non-Opec oil production increased by 90,000 b/d in February, to 57.8m b/d, largely due to higher US output. The IEA predicts growth from these countries of 400,000 b/d in 2017.
Should current production levels be maintained until June – the end of the six month deal – the IEA estimates there will be a market deficit of 500,000 b/d for the first half of 2017.
Opec will decide in May whether to extend the agreement for more time.
“For those looking for a re-balancing of the oil market the message is they should be patient, and hold their nerve,” the IEA said.
Meanwhile, IEA’s data showed oil demand is expected to grow by 1.4m b/d in 2017 to 98m b/d – unchanged from prior estimates. Although down from a rate of 1.7m b/d last year, it is still robust.