IEA reveals reasons for slowdown in 2018 oil demand growth

Marcus Newton
January 23, 2018

The agreement, sealed in January a year ago, is scheduled to last through 2018.

February West Texas Intermediate oil lost 58 cents, or 0.9%, to settle at $63.37 a barrel. "With the strong correlation between inventories and crude prices, this perhaps means we should expect crude prices to moderate in the near term", Bernstein said. Here's our take on the situation and why we believe that this could be the actual turnaround for the oil and gas markets. At 412.7 million barrels, USA crude oil inventories are in the middle of the average range for this time of year.

The main price driver has been a production cut by a group of major oil producers around the Organization of the Petroleum Exporting Countries (OPEC) and Russian Federation, who started to withhold output in January a year ago.

The country is set for "explosive" growth, with cost discipline learned by the U.S. unconventional oil and gas industry following the price crash of late 2014 paying dividends now, the IEA said.

Global demand for oil is forecast to grow by 1.3 million barrels a day, the same as the year before. Even at these forward levels, the price is above the cost of production for a lot of shale producers. "We're uncertain that the pace of inventory drawdown will continue in coming months". However, this is not just about the OPEC cuts. Brent reached its highest since December 2014 on Monday of $70.37.

Rising US Shale Production - A Threat?

"This year promises to be a record-setting one for the USA", the IEA said in its monthly Oil Market Report.

OPEC and friends have pleased the market by delivering committed compliance last year and with the resolve of the key players, keeping harmony in the group will be essential to keep confidence in the markets as we start the year.

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In other news, US crude inventories fell 6.9 million barrels in the week to January 12, to 412.65 million barrels. In December 2016 was a meeting of oil producers outside the OPEC.

According to the US Energy Information Administration, US crude oil inventories fell for the 9th straight week, declining to 6.9mn barrels (mbs) in the week to 12 January.

Although a surge in the USA oil production can not be ruled out, we believe that the U.S. shale producers have learned their lessons from the ongoing commodity slump and have become more conservative over the last three years.

This suggests that a lot of market participants are expecting the prices to come down in the future. The OPEC quota deal is expected to be in force for most of 2018, but a potentially larger-than-expected reduction in world oil stocks may be revised at the mid-year meeting in Vienna that would slow the pace of price growth. The oil prices have jumped over 40% since the first announcement of these production cuts.

There are a number of short-term factors that have been influencing prices. We expect to see a steady yet moderate growth in the USA output over the coming months. In the past such agreements have tended to amount to little as Opec members have often cheated on production quotas to maximise revenues.

Meanwhile, media reported Bank of America Merrill Lynch and Morgan Stanley both upped their forecasts for crude prices earlier this week, while Goldman Sachs said the risks of prices overshooting its current targets are mounting.

Friday's fall came despite Baker Hughes weekly survey of oil rig use revealing a small fall in the number of United States oil rigs in use - down five to 747 this week, although that followed a rise of 10 rigs a week earlier.

Other reports by MaliBehiribAe

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