RIYADH: Despite lowering US crude output courtesy falling oil prices, the oil glut is set to continue – at least for some more time to come.

Although the US Energy Information Administration (EIA) reported growth in domestic crude inventories by 7.6 million barrels last week, levels not seen for this time of year in at least the last 80 years. Yet, the EIA also reported a fall in oil product stocks and total US crude oil production.

US oil output, which peaked in April at 9.6m bpd, has now fallen below 9.1m bpd, by 760,000 barrels a day. Some took this as a sign that the oil glut might abate – sooner – rather than later – causing a somewhat recovery of oil markets as the weekend approached.

The outlook though stays grim.

The Paris-based International Energy Agency is now insisting that on account of the slowing global demand growth and the possibility of a surge in Iranian crude exports following the anticipated lifting of sanctions, global oil markets will remain oversupplied next year too.

While the negative impact of low crude prices on US shale output now evident, the non-Opec supplies are likely to take a hit. Total non-Opec supply is to decline by 500,000 bpd – the steepest drop since 1992. US oil output too is to fall to 12.56m bpd in 2016, from 12.75m this year.

Yet, factors balancing it off seem in strength. With global economic prospects weakening, and the IMF underlining that the global economy would grow this year at its slowest pace since the global financial crisis, the crude demand growth is also now expected to ease out from this year’s five-year high, allowing crude surplus to endure, the IEA Oil Report is predicting.

Global demand growth is also set to get lower to 1.2m bpd in 2016, down from 1.8m bpd this year, amid the emerging global economic outlook.

And the very possibility of Iran returning to the oil markets with its full strength, once the sanctions are lifted, is set to contribute to the continuity of the glut like scenario.

As per the IEA forecast, Iran could boost output to 3.6m barrels a day from its current 2.9m. On the other hand, growing output from Iraq is also impacting the markets. Baghdad has raised output by 130,000 bpd to 4.3m bpd, the IEA estimated.

Overall, output from Organisation of the Petroleum Exporting Countries (Opec) thus increased by 90,000 bpd to 31.72m bpd in September, the highest since July.

Oil inventories in developed nations too expanded in August by double the normal amount, leaving them 204m barrels above the seasonal average. Hence despite hints that output will ultimately falter, global markets continue to remain oversupplied.

IEA hence says: “The market may be off balance for a while longer.” The report then adds: “The demand outlook for 2016 looks markedly softer” because of “downgrades to the macroeconomic outlook and expectations that crude oil prices will not repeat the heavy declines seen in 2015.”

Last month, Opec too produced 31.57m bpd – the highest level since April 2012.

And although markets have taken the ongoing discussion between Russia and Opec rather positively, yet the possibility of any coordination between the two remains remote, to say the least. In a recent note to clients, Helima Croft, the global head of commodity strategy at RBC Capital Markets, too feels it is unlikely.

“The escalated conflict could... make it more difficult for Russian and Opec officials to reach any agreement on a coordinated production cut in the near future,” writes Croft. And she has a point.

A recovery in the global oil and gas industry has been delayed, Schlumberger is now warning too.

Paal Kibsgaard, Schlumberger chief executive officer and chairman, said the outlook for the industry was “increasingly challenging” as a result of the fall in oil prices since last year, emphasising the business environment in the third quarter had continued to deteriorate. And so remains the case.

The glut is set to continue for some more months at least.

Published in Dawn, October 18th , 2015

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