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Record global oil stockpiles could offer an "unprecedented buffer" in times of geopolitical shock, the International Energy Agency (IEA) said on Friday, as it forecast demand growth would slow next year, worsening the glut.
"Stockpiles of oil at a record 3 billion barrels are providing world markets with a degree of comfort. This massive cushion has inflated even as the global oil market adjusts to $50/bbl oil." the agency noted in its November report released Friday.
Global growth is forecast to slow in 2016 to 3.6 percent, according to the latest International Monetary Fund forecasts, which has warned that "downside" risks to the world economy have grown in recent months. Although the sharp drop in oil prices is a result of oversupply rather than a lack of demand, fears surrounding the health of the global economy are keeping investors on edge.
While supply appears to have outpaced demand growth in 2015, keeping oil prices subdued at their current level of $44.23 a barrel for benchmark Brent while U.S. sweet crude trades at $41.62, demand growth could slow next year, the IEA said, a factor that could be bearish for oil markets.
"Demand growth has risen to a five-year high of nearly 2 mb/d, with India galloping to its fastest pace in more than a decade. But gains in demand have been outpaced by vigorous production from OPEC and resilient non-OPEC supply – with Russian output at a post-Soviet record and likely to remain robust in 2016 as well. The net result is brimming crude oil stocks that offer an unprecedented buffer against geopolitical shocks or unexpected supply disruptions."
Factors that have seen global oil demand growth surge in 2015 are "likely to give way" in 2016, the IEA noted, signaling that oil prices could stay lower for longer.
Strong gains in Europe and non-OECD Asia took global oil demand growth up to a four-and-a-half-year high in the third quarter of 2015, but a glut in supply resulting from a shale oil boom and OPEC cartel politics has already weighed heavily on oil prices.
"Global demand growth is forecast to slow to 1.2 million barrels a day (mb/d) in 2016," the IEA said. "Momentum in global oil demand growth, is expected to ease towards its long-term trend as recent props – sharply lower oil prices, colder than-year earlier winter weather and post-recessionary bounces in some countries – are likely to give way," the IEA added.
The IEA did not see the situation changing anytime soon. "Supportive factors that have recently fuelled consumption are expected to fade. The impact of oil's steep price plunge on end users is unlikely to be repeated and economic conditions are forecast to remain problematic in countries such as China."
Despite the glut in oil, supply shows no sign of ebbing with major Middle Eastern producers pumping at record levels and U.S. stockpiles increasing. On Thursday, U.S. Energy Information Administration (EIA) showed U.S. oil inventories rose for a seventh straight week (in the week ending November 6) with stockpiles increasing by 4.2 million barrels.
Confirming the current plentiful oil supply, the IEA noted that "global oil supplies breached 97 mb/d in October, as non-OPEC output recovered from lower levels the previous month."
Non-OPEC refers to oil producers (such as the U.S., Canada and Russia among others) who are not part of the 12-country, Saudi Arabian-led producer group, the Organization of Petroleum Exporting Countries (OPEC).
Despite the sharp fall in oil prices, OPEC has refused to cut production which would support prices, opting instead to keep pumping at record levels (exceeding the group's production ceiling of 30 million barrels a day).
The rationale behind such a strategy is that the group wants to maintain its 40 percent share of the market in the face of rivals, with competition from U.S. shale oil producers a particular bugbear.
The report comes a day after the OPEC published its own November report in which it largely maintained its forecasts for oil demand growth and supply. It maintained its forecast for world oil demand growth in 2015, predicting it will rise by 1.5 million barrels per day (mb/d) to average 92.86 mb/d – a more conservative estimate than the IEA's forecast of 1.8 mb/d in 2015.
In 2016, OPEC saw world oil demand growth reaching 1.25 mb/d (to average 94.14 mb/d) an estimate slightly above the IEA's forecast for 1.2 mb/d. OPEC's report comes before the group meets in Vienna on December 4 to discuss production policy and strategy. So far, there is little sign that OPEC will change course and lower output, signaling that supply could continue to outpace demand and prices could stay lower for longer.