By John Kemp /London


The oil market was massively oversupplied in the second quarter and remains so today, the International Energy Agency (IEA) wrote in its latest monthly oil market report.
“The market’s ability to absorb that oversupply is unlikely to last. Onshore storage space is limited. So is the tanker fleet. New refineries do not get built every day. Something has to give,” the agency warned starkly.
If so, someone forgot to tell the futures markets, where time spreads have remained firm and give no indication storage might be running out.
Brent and WTI futures imply the market is willing to pay less than 45 cents per barrel per month to finance and store crude on average over the next half-year, down from more than $1 at times between January and March.
According to the IEA, global crude oil stocks should have risen by a massive 3.3mn bpd between April and June given the reported imbalance between supply and demand.
In the face of such a massive implied stock build, the agency wondered why prices had not fallen more sharply, and where the oil ended up, given reported stockpiles increased by just one-third of the implied amount.
Strong gasoline demand in the US, plus refinery start-ups and increased oil in transit, could all go some way to explain why prices are higher and stocks lower than expected.
But more than 100mn barrels have disappeared into the “miscellaneous to balance” line in the agency’s market accounts, which is an awful lot of oil to lose in the statistical system.
The agency thinks the sources of support cannot last so the market will have to continue rebalancing in 2016.
It forecasts non-Opec production will remain flat in 2016, after rising 2.4mn bpd in 2014 and 1mn bpd in 2015.
But that may require a further fall in prices to force the necessary slowdown in shale and non-shale production. “The bottom of the market may still be ahead,” the agency warned.
Given the enormous amount of crude that has gone unaccounted for in the first half of 2015, some scepticism is justified.
If the agency is right, though, crude prices will have to fall further to force a further slowdown in non-Opec production.
Price weakness would be concentrated in the near term, causing the time spreads to soften.
So far, there has not been much sign of renewed softening in the spreads. In fact, the market has moved in the opposite direction.
The discount for Brent delivered in September compared with December 2015 has actually narrowed from almost $2 per barrel on June 22 to less than $1.40 currently.
If the IEA’s forecast is to be believed, however, and many analysts share the same view, then the time spreads should weaken again.
Goldman Sachs forecast further falls in spot prices by October and said “evidence of a growing market surplus should weigh on time spreads going forward” in a research note published on July 8.
The alternative view is that fuel demand will continue to grow strongly, especially after the recent drop in spot prices, while the growth in shale output will continue to stall or even reverse in the later part of the year.
The spreads are set to become a key battleground between contending views about how far the rebalancing of the oil market still has to run.

* John Kemp is a Reuters’ market analyst. The views expressed are his own.