IEA Warns “Saudis, Russians To Pump As Much Oil As Possible”

IEA Warns “Saudis, Russians To Pump As Much Oil As Possible”

Tyler Durden’s pictureSubmitted by Tyler Durden on 04/22/2016

While the IEA has been urgently pushing an agenda of the oil market “rebalancing” in coming months in order to validate rising oil prices, the reality is that there are two parts to the equation: demand and supply. We will have to say more on demand shortly, because as it turns out most of it may have come from none other than China where commodities are merely the latest speculative bubble while China has been furiously stockpiling oil in what is merely pulling future demand to the present, however on the far more important supply side, where the key variable has become shale production over the coming year, earlier today the head of the Oil Industry and Markets Division at the International Energy Agency, Neil Atkinson, told CNBC that he believed both producers will continue to “pump as much oil as possible.”

This is what he said:

“In the post-Doha world, when we’re still in what is essentially a free market for oil, the Russians will pump as much oil out as the market will absorb and the Saudis have said much the same thing.”

Which incidentally is also what we have been saying for weeks heading into Doha, a meeting which was doomed from the beginning and which saw record oil supply from not only Russia but also Iraq in the last few weeks. This record production is set to continue.

Neil Atkinson painted an even bleaker picture saying that “we’re back to where we were before Doha where people produce what they can, sell what they can for whatever price they can achieve and the market takes care of the surpluses in time.”

Atkinson added something else known to regular ZH readers, namely that “as far as the Russians are concerned, even in the run-up to Doha when they were going to be party to an agreement to freeze production, they were actually pumping up production anyway.”

The IEA staffer noted that Saudi Arabia had spare production capacity (of up to 2 million barrels a day) as well a couple of other Middle Eastern producers such as Kuwait and the UAE but that “apart from that there is no spare production capacity essentially anywhere in the world.”

Of course, the IEA could not leave it on a sour note and concluded that he believes that oil markets would come close to a balance in the second half of 2016 with U.S. shale oil production expected to fall further this year. However, he said there was a possibility that the U.S. could ramp up production easily again in future. “In our numbers, the U.S. by itself is going to shed something like 450,000 to 500,000 barrels a day in 2016 versus 2015,” Atkinson said, “it’s coming down before our very eyes.”

Maybe it is, but as we also wrote a month ago, as a result of not only newly reset hedges at prices which are now close to breakeven but also due to the reactivation of DUCs, or drilled but uncompleted wells, “U.S. Production Is Coming Back On Line.”

As Reuters admitted previously, “a dreaded scenario for U.S. oil bulls might just be becoming a reality” as some U.S. shale oil producers, including Oasis Petroleum and Pioneer Natural Resources Co, are activating drilled but uncompleted wells (DUCs) in a reversal in strategy that threatens to bring more crude to a saturated market and dampen any sustained rebound in prices.

Ultimately it will boil down to one simple thing: is the world’s oil storage, which is rapidly approaching operational capacity in the case of Cushing and other U.S. PADD regions, and also includes over a hundred million barrels of oil held in offshore tankers, provide enough of a buffer to offset the pick up in global demand, which has yet to materialize, or will the collapsing contango force the oil held offshore to be unloaded and flood the world with all those barrels which will force wholesale dumping and liquidation.

And finally, as we were concluding this post, the following news hit the tape:

  • Libya’s eastern govt’s first oil shipment of 650k bbl crude from Messla and Sarir oilfields to leave tomorrow for Malta on tanker Distya Ameya from Hariga, Libya, National Oil Corp. chief Nagi Elmagrabi says in stmt.

Finally, keep in mind that the current oil rally is – at least so far – a replica of what happened in the summer of 2015 when oil soared for several months only to tumble to fresh lows at the end of the year. The driving catalyst back then was China. And, as we will shortly show, China will be the negative catalyst once again.

The complete interview with Atkinson below:

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