IEA alert: Oil price cut pact may fast sop up market glut

A pact by leading producers to cut output could quickly begin sopping up the glut on the oil market that has weighed on prices, the IEA said on Tuesday as it also hiked its demand forecast.

The agreements, if implemented, would “hasten the market’s return to balance by working off the inventory overhang,” said the International Energy Agency, which analyses energy markets for major oil consuming nations.

The recent deals are the first joint cuts by OPEC and non-OPEC nations since 2001 and aim to reduce production by just under 1.8 million barrels per day (mbd).

“If OPEC and non-OPEC were to implement strictly their agreed cuts, global inventories could start to draw in the first half of next year,” it added.

The IEA said it was not making any forecast, but suggested that implementation of the pact could result in a draw of 0.6 mbd into stocks.

Oil stocks in the advanced nations which fund the IEA hit a record of 3,102 mb in July.

While they have since declined, “they remain 300 mb above the five-year average, providing a more than ample cushion going into 2017”, said the IEA.

The IEA also said that “an implicit goal” of the pact may be “to keep the price of oil from falling below 50” per barrel.

Crude oil prices have risen by around 10 per barrel in recent weeks on the deals by the OPEC and non-OPEC nations.

The benchmark international contract, Brent crude, was trading at around USD 55.99 per barrel in late morning on Tuesday, around 50 cents up from its level ahead of the report.

“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,” said the IEA.

A price of USD 50 per barrel is seen as the level at which it becomes profitable for many companies to produce oil.

Oil exporting nations have been suffering with prices under that level, even dropping below 30 per barrel at the beginning of this year, as Saudi Arabia led OPEC nations in stepping up output in order gain market share and push rivals with higher production costs out of business.