"The Oil Market Could Drown In Oversupply," IEA Warns

Tyler Durden's picture

On Monday, we noted with some incredulity that North Dakota Sour - a high-sulfur grade of crude - was briefly going for -$0.50 at the Koch brothers' Flint Hills Resources refining arm.

That’s not a misprint. If you had yourself some North Dakota Sour, you’d have to pay a refinery to take it off your hands. Your product was worth less than nothing.

We use the past tense there because once Bloomberg broke the story, Flint Hills quickly replaced the negative number with a positive one - you can now get $1.50.

Negative oil prices - even if they merely reflect the increased cost of transporting certain grades - underscore just how acute the downturn has become in the face of a global deflationary supply glut created by the Saudis, perpetuated by ZIRP, and exacerbated by the incipient threat of Iran’s return to market.

Now, with crude having dipped below $30 (today’s rebound notwithstanding) the question on everyone’s mind is simply this: can oil continue to move lower? According to the IEA, the answer is “an emphatic yes.”

In its latest oil market report, the agency warns that the world could “drown in oversupply” with the return of Iranian crude. "If Iran can move quickly to offer its oil under attractive terms, there may be more ‘pricing in’ to come,” the agency’s monthly report says. “While the pace of stock building eases in the second half of the year as supply from non-OPEC producers falls, unless something changes, the oil market could drown in over- supply.”

To be sure, the IEA isn’t convinced the Iranians will be able to meet their own targets for production increases. While Tehran is aiming for an immediate increase of 500,000 b/d, the IEA says the number is more likely to be in the neighborhood of 300,000 b/d in Q1 and 600,000 b/d my mid-year. Iran is shooting for a 1 million b/d increase by year end. Still, that's enough additional production to offset falling supply from non-OPEC producers.

The current downturn is attributable to “weak market fundamentals, expectations for and lifting of Iranian sanctions, stronger USD after Fed rate hike, weak economic numbers, and turmoil in financial markets", the agency continues, adding that Saudi Arabia’s move to cut subsidies is likely to weigh on domestic demand. Here are the summary bullets courtesy of Bloomberg who notes that "with OPEC supply potentially expanding and demand growth slowing, global inventories could accumulate by a further 285 million in 2016 after swelling by 1 billion barrels last year":

  • Rout may deepen as mkt drowns in supply, Iran returns
  • Yes, Iran’s return can help drive price lower, IEA says
  • Iran’s return intensifying battle for Europe mkt
  • OPEC Dec. output drops 90k b/d, led by Saudis, Iraq: IEA
  • Tank tops to be tested; China to add 145m bbls capacity
  • Floating storage crude diminishes slowly; bottlenecks ease
  • Warm winter weighed on OECD demand in 4Q
  • Europe refinery margins seen rebounding in Jan.
  • Saudi subsidy cut to damp kingdom’s oil demand
  • IEA revises 2016 world oil demand fcast to 95.7m b/d from 95.8m b/d in monthly oil report; 2015 world demand revised to 94.5m from 94.6m b/d
  • Demand growth to slow to 1.2m b/d in 2016 vs 1.7m b/d in 2015
  • Non-OPEC supply seen falling 600k b/d in 2016
  • Est. for call on OPEC crude, incl. Indonesia, revised down 300k b/d to 31.7 m b/d
  • OPEC production in Dec. fell by 90k b/d to 32.28m b/d
  • Iran return to intl mkt may add 300k b/d by end 1Q

Despite some optimism around Chinese oil demand (which apparently is all the market needs to fuel a 5% Brent rally), the demand growth story is "faltering," to quote Goldman. Here's a look across markets:

Meanwhile, supply is resilient:

And inventories are overflowing:

So despite today's China-driven relief rally, the fundamentals suggest a sustained move higher is essentially out of the question and from a medium-term perspective, any impact on prices from a slowdown in non-OPEC supply will be immediately offset by stepped up Iranian production. 

Ultimately then, the Wells Fargos and Citis of the world are going to need a lot of rope when it comes to how long they can avoid marking their energy loan books to market because the rebound they need to avoid dramatic hikes in loan loss reserves isn't coming any time soon. 

As for the Saudis, check back in 11 months to find out whether Riyadh's 13% budget deficit forecast turns out to have been far too optimistic.

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Pew Pew Pew's picture

Over-pumping by OPEC just to short Russia and Iran and drive the Frackers out of business.

firstdivision's picture

Which is why I'm looking at those 17-18 contracts to hold.

Father Thyme's picture
Father Thyme (not verified) firstdivision Jan 19, 2016 8:07 AM

If I could save oil in a bottle
The first thing that I'd like to do
Is to save every drop
'Til low prices pass away
Just to sell them to you

MalteseFalcon's picture

"Ultimately then, the Wells Fargos and Citis of the world are going to need a lot of rope when it comes to how long they can avoid marking their energy loan books to market because the rebound they need to avoid dramatic hikes in loan loss reserves isn't coming any time soon."

Let's see:

1.  Use mark to fantasy to value the loans

2.  Open up the FED spigot to cover cash flow.

Unthinkable 10 years ago.  SOP now.

junction's picture

Don't believe anything that comes from either Obama or the ayatollahs.  The description of the arranged release of the Washington Post reporter and others from Iran partially follows the script of "Bridge of Spies," with the exception that the Post reporter is not identified as a spy. Lead negotiator McGurk says he will scuttle the deal if all the hostages are not released.  McGurk is pretending to be the Tom Hanks character, James Donovan, in the movie. 

What a joke.  Obama, realizing the Saudi royal family is heading for economic oblivion, is now dealing with the Iranians.  The only certainty is that, unlike the Steven Spielberg spy movie, real life for the United States will end up with an unhappy ending. 

From the New York Times (16Jan2016) But as Mr. Rezaian and the other two prisoners, Amir Hekmati and Saeed Abedini, were preparing to leave, no one could find Mr. Rezaian’s wife, Yeganeh Salehi, or his mother, Mary. Ms. Salehi, an Iranian journalist, had been arrested with Mr. Rezaian in July 2014 before being released, and his mother had gone to Iran to be closer to her imprisoned son.

“They had disappeared,” said an American official, who along with others described the events on the condition of anonymity. “Nobody could find them, and they were not answering phones. The Iranians then said there were legal issues that would prevent either from leaving the country.”

Iranian officials tried to persuade the Americans and the Swiss to take the three prisoners and leave without Ms. Salehi or Ms. Rezaian. In Geneva, Brett McGurk, the lead American negotiator, refused, saying the deal had always included Mr. Rezaian’s family.

But that did not end the standoff. After midnight in Tehran, the Americans finally obtained an order from Iran’s prosecutor general for the family to leave. But Ms. Salehi and Ms. Rezaian could still not be found.

Several hours later, around 2 a.m. in Geneva, Iranian officials summoned Mr. McGurk to their hotel room and said the deal had to be consummated without Mr. Rezaian’s wife and mother. Mr. McGurk said that if they did not show up at the plane waiting on the tarmac promptly, there would be no deal.

“We started to conclude that Mary and Yegi were being held to destroy the deal,” the American official said.

It was not until 4 a.m. in Geneva, or 6:30 a.m. in Tehran, that the Americans finally reached Ms. Rezaian. She and Ms. Salehi were by then back at their hotel. The Americans contacted the Swiss and asked them to pick up the women and take them to the airport.

Yao's picture

Russia and North America perhaps (if your thesis is correct).  But not the Persians, they're sitting on some of the cheapest to produce oil on the planet.  Going toe-to-toe with the Great Satan will keep the regime in power longer than the Saudis can remain solvent. 

JustObserving's picture

Another bullshit article.  The decline in oil prices is an attack by US against Russia:

The current decline in oil prices is a systematic manipulation of the hydrocarbons market by the USA with the help of the Gulf monarchies, which have large reserves. OPEC, created as a mega-regulator of the oil market, can do nothing with a nearly fourfold drop in the price of a barrel of oil.

Why is this so? Because OPEC is controlled by the United States via Saudi Arabia,  Qatar and Bahrain. Any attempts by the remaining oil-producing states to agree to reduce production are automatically torpedoed. The Saudis extract more and more oil selling it at an ever lower price and flooding the market.


Did the U.S. and the Saudis Conspire to Push Down Oil Prices?

Are falling oil prices part of a US-Saudi plan to inflict economic damage on Russia, Iran and Venezuela?

Venezuelan President Nicolas Maduro seems to think so. In a recent interview that appeared in Reuters, Maduro said he thought the United States and Saudi Arabia wanted to drive down oil prices “to harm Russia.”

Bolivian President Evo Morales agrees with Maduro and told journalists at RT that: “The reduction in oil prices was provoked by the US as an attack on the economies of Venezuela and Russia. In the face of such economic and political attacks, the nations must be united.”

Iranian President Hassan Rouhani said the same thing,with a slightly different twist: “The main reason for (the oil price plunge) is a political conspiracy by certain countries against the interests of the region and the Islamic world … Iran and people of the region will not forget such … treachery against the interests of the Muslim world.”

US-Saudi “treachery”? Is that what’s really driving down oil prices?

Bottom line: Falling oil prices and the plunging ruble are not some kind of free market accident brought on by oversupply and weak demand. That’s baloney. They’re part of a broader geopolitical strategy to strangle the Russian economy, topple Putin, and establish US hegemony across the Asian landmass. It’s all part of Washington’s plan to maintain its top-spot as the world’s only superpower even though its economy is in irreversible decline.



Somewhat Evolved Monkey's picture
Somewhat Evolved Monkey (not verified) JustObserving Jan 19, 2016 7:49 AM

Here's a wrench...


I think you have a few screws loose!


But seriously, anybody who thinks they know exactly why a global complex commodity like oil is trading down, probably needs their head examined.


Although Occam's Razor would almost certainly lead us to the simplest explanation, which is over supply and under demand.


Russia-insider.com, sounds like a great website!

NotApplicable's picture

And the simplest explanation is due to living in ZIRP/NIRP World, where free money has created massive over-supply. The Saudi line is pure spin designed to keep attention away from the banksters desperately seeking ROI.

FrankieGoesToHollywood's picture

"which is over supply and under demand"

Thanks for the econ 101 lesson.

Ghordius's picture

once upon a time, cheap oil was good for America, and had a relatively negligible effect on the rest of the world

then came the times when cheap oil made some producers so mad they would even invade their neighbours (and creditors, in the case of Kuwait)

now... it's depressing. damn, I find this all so depressing. I feel like the depressed robot out of "The Hitchhiker's Guide To The Galaxy"

VinceFostersGhost's picture



Gordo.....I HAVE to buy overpriced healthcare.....I need cheap oil.


Yeah....pretty stoked about the cheap oil.

Sandmann's picture

Saddam did not invade Kuwait because of "cheap oil". it was because Kuwait was STEALING Iraqi oil using directional drilling gear sold by the USA. Saddam asked the Us Ambassador April Glaspie if the Us had any objections and she stated the Us had no axe to grind so he invaded. His argument advanced at the time was that it was Iraqi territory Kuwait had seized.


Ghordius's picture

+1 Sandmann, I was hinting to the fact that he had a huge budget problem because of cheap oil, and he had debt versus Kuwait that was stipulated with a higher oil price in mind. the biggest argument he had, in my memory, with Kuwait was that debt, not the directional drilling

new game's picture

a soveriegn nation run by loyal leaders do not let this shit happen.

same with manufacturing. the enemy lies within-dot gov, folks...

new game's picture

short the top dummy STTD

Manipuflation's picture

Should I go fill up the 96 Lincoln again?  I still have moar than half a tank though.  I love a V8.  -15 below zero and she runs fine.  Huge clouds of dual exhaust and leather interior. 

new game's picture

maybe iran is taking aim at S.A., rest collateral, just thinkin outload...

like a game of chicken.

new game's picture

the source of all this bullshit is the omni powerfull fed with their reserve currency status creating fiat and funding a growing military budget. i think this cuts the chase to the root problem.

of course, on board lock stock and barrel(pun intended), are neocons running the budget matters both direct and special funding.. so, by force merica is keeping any economic rising power subserviant to this modern day roman empire experiment. what could happen imfo is russia/china say enough of this fucking bullshit and go after the jugular-the petro dolla regime, rome declines(swirls), but not without a fight(moar war)...

Sandmann's picture

Saudi as swing producer taken out changes dynamic

smacker's picture

I've made similar comments to this before but the oil producers are playing an utterly irresponsible global energy game by failing to control oil supply to match demand, in some cases doing it deliberately as part of economic war with other countries. Top of this list is of course Saudi Arabia but others have joined the oversupply party too, to maintain market share. It increases irresponsible use of oil as for any product that's too cheap and consumes a finite source of energy.

As someone who believes in Peak Oil (ie easy oil) this madness can only last until the global economy eventually picks up and demand rises. Then we will see prices take-off. Slowly at first, then exponentially. The price will become so high that it'll tip the global economy back into recession and put us all back on the roundabout.

overmedicatedundersexed's picture

smaker, saudi is using oil as weapon - well some producers might use other weapons to reduce thatsaudi &gulf states oil coming to market..Putin is justified to do so. the west is playing a game much like we did against Japan prior to WWII. i have invested on violence and greed winning the day.

Monetas's picture
Monetas (not verified) smacker Jan 19, 2016 8:35 AM

Over supply of simplistic, socialist sophistry ?

innertrader's picture

Even in GOV controlled markets, like the Soviet Union once had, it never works!  It's just a matter of time before Demand and Supply determine Reality.  Sure they can control markets for long periods of time, but eventually they ALWAYS LOOSE and they ALWAYS WILL, PERIOD!  I don't think this is so much of a "controled" market.  For me, the $150 oil created the $30 oil, end of story.

Downtoolong's picture


After 40 years of global oil market prices being propped up by manipulations of some major producers, what we are witnessing now is simply a return to a true free market dictated by supply and demand. It’s one of the few markets that has this characteristic in the world today. Economic purists should be rejoicing this fact, not condemning it.


Because the change has come so suddenly, the market has overreacted to the downside in a supply glut. This always happens after any manipulated market is finally set free. But, this too will eventually correct itself. And the longer prices stay abnormally low, the more likely we will see spikes to the high side down the road before it all settles into a balance.




NoPension's picture

They should just store this oil underground, and bring it out when the price goes up.

Monetas's picture
Monetas (not verified) Jan 19, 2016 8:37 AM

I happen to like low gas prices .... but, then .... I'm just a consumer .... minding my own business ?

Monetas's picture
Monetas (not verified) Jan 19, 2016 8:44 AM

A slight respite .... in the war on white America .... the soft genocide .... of high expectations .... war, taxes, competition, regulation, welfare, delayed family formation, kids living in basement on drugs and paying for Muslim invaders to overthrow our way of life ?

Disc Jockey's picture

This article makes me want to smoke some good tobacco.

Monetas's picture
Monetas (not verified) Disc Jockey Jan 19, 2016 8:58 AM

"After a good taco .... a good tobacco"  Mexican saying

viator's picture

What ever happened to "Peak Oil"?

Ghordius's picture

nothing. it still applies to every single known oil field. imagine a bottle. the emptier, the more you tilt it, the more it flows. it's the tilt that controls the flow

the flow... has little to do with how much is left in the bottle. meanwhile, fracking is the new technology that changed some parameters

orangegeek's picture

Someone figured out that it was all a lie for insiders to dump their positions and for bagholders to line up and get slaughtered.



22winmag's picture

It's on hold for the moment, just like the conflict in Ukraine.

Haole's picture

You mean the fantasy scarcity fiction peddled by those from The Oil Drum to Steve St. Angelo and all kinds of commentators?

The powers decided Glut Oil was more advantageous for them... Exceptional backfire too...

fowlerja's picture

Guess they found more oil and moved the peak into the future...

smacker's picture

It's waiting in the wings ready to strike if/when demand for oil rises...

fowlerja's picture

The market place is such a wonderful world of its own...several years ago oil was selling for $147 barrel... now $30 a barrel... has the world changed that much to warrant this type of price reduction?