IEA energy watchdog says oil market could ‘drown in oversupply’

The oil market “could drown in oversupply” as a rise in Iranian output offsets production cuts elsewhere, threatening a further price collapse, the world’s leading energy forecaster has said.

In a stark assessment of the challenges facing the global oil industry, the International Energy Agency warned on Tuesday of an overhang of at least 1m barrels a day for a third consecutive year in 2016.

Production outside the Opec cartel would decline this year, the IEA said. But that would be offset by slower demand growth and higher production from Iran now that sanctions linked to its nuclear programme had been lifted.

“Unless something changes, the oil market could drown in oversupply,” the wealthy nations’ energy watchdog said in its closely watched monthly oil market report.

If Iran — a powerful member of the producers’ group — moved quickly to offer its oil under attractive terms and its Opec peers such as Saudi Arabia refused to “stay on the sidelines”, prices could lurch lower, the IEA said.

In this scenario the Paris-based agency said there would be enormous strain “on the ability of the oil system to absorb” the glut.

“The exact pace of the flow is hard to tell, but Iran is showing they are back in the game,” said Neil Atkinson, the new head of the IEA’s oil market division.

“Saudi Arabia and others are going to ensure they don’t lose out. They are not going to give up the fight and say ‘welcome back’. For all intents and purposes, this is a free market.”

Oil which sank to fresh 12-year lows this week — below $28 a barrel — rebounded on Tuesday as hedge funds took profits on their bets on lower prices.

The global Brent benchmark rose $1.58 to $30.14 a barrel while US marker West Texas Intermediate was up 65 cents to $30.07 a barrel.

Robust data on Chinese oil consumption provide a further prop for prices.

Oil prices have tumbled almost 75 per cent in 18 months as the largest producer countries have refused to give ground, with supplies and inventories ballooning to near-record levels.

Global oil stocks rose by 1bn barrels in 2015 from the year before and the IEA has forecast a further increase of 285m barrels over the course of 2016.

“Despite significant capacity expansions over 2016, this stock build will put storage infrastructure under pressure and could see floating storage become profitable,” it added.

Iran has vowed to boost output by 500,000 b/d. The IEA estimates that about 300,000 b/d of additional crude from the powerful Opec member could be flowing to world markets by March.

This will offset the first year-on-year fall in non-Opec supply — of 600,000 b/d in 2016 — since at least 2012. Last year production from outside the Opec producers’ group, led by the “stubbornly robust US”, grew 1.3m b/d from the previous year to 57.6m b/d.