THE Organisation of the Petroleum Exporting Countries (Opec) and International Energy Agency (IEA) were formed with separate political agendas, representing two distinct sides of the coin. But over the last decade or so, with professionals taking over, the two entities had begun to concur on issues more than ever before.

But for a change it seems, they are diverging again on the moot issue: is the oil market glut finally going to be cleared? And if yes, when? An absorbing debate is on.

The Opec data is pointing to markets rebalancing in 2018, while the IEA insists that the goal is still elusive. As per the Opec estimates, its production curbs are helping neutralise the excess oil inventories that have depressed crude prices for more than three years now, while, the OECD energy watchdog IEA is of the view that despite the output cuts, the surplus will stay and barely budge in 2018.

As a Bloomberg report puts it, both the IEA and Opec are converging on the fact the output cuts are working. The surplus oil inventories in developed nations fell to 111 million barrels in October, from 291m last November.

However, it is here that they begin to diverge. The Opec is of the view that the markets would be totally rebalanced by late next year as the inventory plunges further plunge by about 130m barrels. However, in contrast, the IEA sees inventories remaining steady as new supply growth surpasses gains in demand. In its December Monthly Oil Report, the IEA almost warned the Opec, that new supply growth may deprive it of a “Happy New Year.”

However the two agree that the call on Opec crude will be somewhere around 32.3m barrels per day (bpd) on average in the first half of 2018. However, by mid next year, the Opec and the IEA begin drifting apart in their projections. Opec is insisting that the call on its crude in H218 would be around 34m bpd, while the IEA sees a requirement of just 32.7m bpd.

The emerging divergence in positions is because of two major reasons. While Opec expects rival supplies to expand by 1m bpd next year, the IEA forecasts non-Opec output to grow by 1.6m bpd. The US shale oil output projections are partly to be blamed for this. The Opec concedes that the US crude production would go up by 720,000 bpd next year, while the IEA’s forecast for the US output is higher by about 20 per cent.

The US shale output continues to gain momentum. The huge jump in output in September, plus the spike in rig count activity over the past few weeks, points to strength in the US shale sector. Against that backdrop, the IEA predicted that non-Opec supply would grow by 1.6m bpd in 2018, a rather significant upward revision of 0.2m bpd compared to its last month’s report.

Consultant Rystad Energy also underlines that almost 1,000 horizontal wells were completed in the US in October, the highest since March 2015. That should ensure a rush of fresh supply added onto the market by the end of this year and into 2018.

Adding insult to the injury for Opec, the IEA sees oil demand growing by just 1.3m bpd during 2018. In other words, supply will grow at a faster pace than demand next year, opening up a global surplus once again, writes Nick Cunningham. “A lot could change in the next few months but it looks as if the producers’ hopes for a happy New Year with de-stocking continuing into 2018 at the same 500,000 bpd pace we have seen in 2017 may not be fulfilled,” the IEA reported, underlining that the bullishness and optimism that has barely returned to the oil markets for the first time in years, won’t last.

The IEA was also quick to point out the prime reason for it being bearish is the fact that inventory drawdowns seem to end soon. “Going into 1Q18, our balances imply that global oil stocks will increase by 300,000 bpd, assuming stable Opec crude production of 32.5m bpd,” the IEA said in its MOR.

And with Russia’s Arctic oil flows soaring, Julian Lee in a recent story points to the growing pressure on Moscow for an ‘exit strategy’ from the Opec led output restraint.

With 2017 coming to an end, challenges before the oil producers continue to be daunting to say the least.

Published in Dawn, December 17th, 2017