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IEA predicts oil glut will end if deal delivered

Demand for oil will outstrip supply in the next six months as long as Opec and countries outside the cartel can implement a deal signed over the weekend to lower output, according to one of the world’s leading energy forecasters.

The International Energy Agency said the planned production cuts, which add up to 1.8m barrels a day, could reduce stockpiles by as much as 600,000 b/d over in the first half of 2017 if all of the signatories deliver their pledges.

“Success means the reinforcement of prices and revenue stability for producers after two difficult years; failure risks starting a fourth year of stock builds and a possible return to lower prices,” the Paris-based global energy advisory body said in a report on Tuesday.

The IEA’s widely followed monthly report marks the first major assessment of the balance between supply and demand in the market since Opec first agreed to reduce production on November 30.

Previously the agency had forecast the market would remain oversupplied until at least the second half of 2017, with the prospect of the market remaining in surplus for a fourth straight year.

However, if Opec reduces supply and meet its new production target of 32.7 b/d and non-members deliver cuts of 558,000 b/d agreed on Saturday the market will move into a deficit of 600,000 b/d in the first half of next year, the IEA said.

The biggest global supply glut in a generation has seen oil prices halve since mid-2014, but that drop has spurred major producers into action.

The IEA said it was not predicting how much Opec and non-Opec countries would actually cut by, but basing its assessment on the supply targets announced.

Many analysts think full compliance with the proposed curbs is unlikely, though Opec kingpin Saudi Arabia has suggested it could cut output further if necessary, signalling it is serious about speeding the drawdown in near record inventories build up in the past three years.

Shortly after the non-Opec cuts were announced at the weekend, Saudi Arabia’s energy minister Khalid al-Falih said his country was willing to cut even more than the agreed level of 10.06 mbpd.

“If anyone needed a proof of Saudi Arabia’s commitment in their effort to deplete global oil stocks here it is,” said analysts at PVM, a London-based brokerage.

Brent, the international oil benchmark, has rallied by more than 16 per cent to above $55 a barrel for the first time in almost 18 months since Opec first formalised supply targets two weeks ago. On Tuesday morning, Brent was up a further 35 cents to $56.06 a barrel.

“Clearly, the next few weeks will be crucial in determining if the production cuts are being implemented and whether the recent increase in oil prices will last,” the IEA added.

The IEA also revised its forecast for demand higher to 1.4m b/d in 2016 and 1.3m b/d in 2017, on expectations of greater appetite from China and the US, the world’s two largest crude consumers. The demand upgrades for both years are a little over 100,000 b/d.

The agency also said non-Opec supply growth for 2017 had been revised lower by 255,000 b/d since last month’s report to 220,000 b/d, though this is partly contingent on Russia reducing supply under its pact with Opec.

The rebound in prices could also lead to higher output from US shale producers, the IEA said, but was cautious in its assessment, arguing higher spending by the sector was already largely factored in. “Only a marginal increase in US output is foreseen compared to our earlier estimates,” the IEA said.

It does, however, see US shale output rising marginally in 2017.

“After more than two years of very difficult times, the US shale business model seems on a much more sustainable path,” it said. “Nevertheless, it remains to be seen whether companies can remain cash flow positive when the industry scales up activity and capital spending and as upward pressure on costs once again takes hold.”

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