• Friday, July 19, 2024
businessday logo

BusinessDay

‘IEA warns oil market could ‘drown in oversupply’

Iran-oil

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

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

While production outside the Opec cartel will decline this year, the IEA said, it would be offset by slower demand growth and higher production from Iran now that sanctions linked to its nuclear programme have 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 — can move quickly to offer its oil under attractive terms and its Opec peers such as Saudi Arabia refuse to “stay on the sidelines”, prices could lurch lower, the IEA said.

In this scenario, the Paris-based agency said there would 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,” he added. “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 sunk to new 12-year lows this week — below $28 a barrel — rebounded on Tuesday as hedge funds banked 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 increased 65 cents to $30.07 a barrel. Robust data on Chinese oil consumption provide a further prop for prices.