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London — Global oil prices will likely rise from current levels on a growing supply deficit in the second half of the year if OPEC and other key oil producers extend their output cut deal later this month, the International Energy Agency's chief oil analyst said in an interview Wednesday.

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Related podcast -- Interview: IEA sees oil prices firming if OPEC cuts rollover

Assuming the current OPEC-led output cut deal is extended for a further six months, oil markets will find support from sharply lower oil stock levels during the year despite recovering output of US shale oil, Neil Atkinson, the IEA's head of oil industry and market division said.

With OPEC output cuts kicking in from January, oil markets are already "very close to balance" with supply likely to undershoot demand in the current quarter, Atkinson said.

"If you were to take the current level of OPEC production and assume that continues at the same level for the rest of 2017, and nothing else changes on the supply/demand balance, then that would imply that stocks will draw significantly, particularly in the second half of 2017," Atkinson said. OECD oil stocks fell both in February and March but remained 336 million barrels above the five-year average at the end of February, the IEA said.

"As the market begins to perceive that the balance has returned, and foresees that we might be moving into deficit...through the rest of 2017, prices may well start to increase but we don't expect them to increase very sharply," Atkinson said.

"So as we go through the second half of the year it's quite likely that oil stocks will begin to fall towards the five-year average."


Referring to the sharp sell-off in oil prices over the last two weeks, with Brent falling close to the $48/b level when OPEC agreed in late November to curb its production, Atkinson said he sees signs that market watchers are becoming impatient over clearer signals that the market is rebalancing.

"I think it might actually come down to just a lack of patience. I think maybe a lot of people in the marketplace seem to assume that, because the OPEC and non-OPEC production cuts were implemented from January, as if by magic the market changes it shape almost overnight...In practice the market takes time to absorb the high levels of oil being produced in the later parts of 2016...and that does take time," he said.

Brent crude was trading around $50/b Tuesday, up from a five month low of $47/b on Friday, but still below the $55/b level it had been trading since December last year.

"We are seeing that the market is moving into deficit in the first half of 2017, it may be taking longer than some people would like, but it is gradually beginning to happen," Atkinson said.

Speaking earlier to the Platts' Global Crude Oil Summit in London, Atkinson said he believes that, "it is starting to become clear that if the objective of OPEC cuts was to flip the market from a surplus into deficit that is now slowly beginning to happen."


On the demand side, Atkinson said the IEA continues to expect global oil demand growth to average 1.3 million b/d this year with demand growth to continue "but at a slower pace" over the coming five years.

Demand is expected to recover in Brazil, India and Russia, and recent weakness has been offset by solid growth in China, Hong Kong and Taiwan, he said.

Atkinson said he sees the IEA's oil demand projections have not "fundamentally changed" in the short term in the wake of recent political upheaval in the US following the Trump victory and the Brexit vote in the UK with only "minimal" impact on demand so far.

Longer term, however, he said the recent and upcoming spate of elections this year may have an impact of demand but will hinge on policy decisions by the new administrations.

"We still see world oil demand growing by at least a million b/d (a year) for the next five years, and probably several years beyond that, before longer term changes begin to have an impact," he said.

Despite more recent signals of slowing economic growth in China, he said the IEA expects both China and India to remain a key component of oil demand in the coming years.


Atkinson said the IEA remains concerned over a potential oil supply gap within the next five years as a result of the plummet in upstream spending since the oil price slump in 2014.

Global upstream spending has collapsed by around 25% for last two years in a row and capital spending plans by the industry are only expected to marginally recover this year, the IEA believes.

In its five-year outlook published last month, the IEA estimated that OPEC's spare crude production capacity could fall below 2 million b/d in 2022 from almost 4 million b/d last year, heightening fears of a supply crunch.

As a result, the IEA currently estimates that OPEC's spare production capacity slide to just 2% of global supply in 2022, a 14-year low that could be a signal for "significantly higher prices," Atkinson said.

"We think unless something changes, there is the potential for very tight supplies by 2020," Atkinson said. "We would be storing up trouble for the future and this is potentially a harbinger of instability."

Atkinson acknowledged, however, that it "isn't too late to avert a supply crunch" if industry spending plans on projects such as shale and deepwater pick up this year as oil prices firm.

--Robert Perkins,
--Edited by Jeremy Lovell,