While a drop in costs and efficiency improvements will help to offset some of the spending cuts, output is likely to take a hit soon.

The IEA

Categorized in : Energy

U.S. stocks may soon test storage capacity limits. That would inevitably lead to renewed price weakness, which in turn could trigger the supply cuts that have so far remained elusive, while the U.S. supply response to lower prices might take longer to kick in than expected, it might also prove more abrupt.

Not only have product prices lagged those of crude during the selloff - as is common in a downturn - but they have raced ahead of them in the rebound, keeping refining margins remarkably firm, and supporting unexpectedly strong throughputs in once-depressed refining centres such as Europe and OECD Asia, product demand has shown signs of life, with even European demand emerging from a secular decline to show strong growth of 3.2 percent in December and 0.9 percent in January.

Yet U.S. supply so far shows precious little sign of slowing down. Quite to the contrary, it continues to defy expectations.

Tentative signs of a demand recovery have emerged with the turn of the year, with a heavy emphasis reserved for the word 'tentative'.

Unlike earlier price drops, this one is both supply- and demand-d... by The IEA

Unlike earlier price drops, this one is both supply- and demand-driven.

The market rebalancing will likely occur relatively swiftly but will be comparatively limited in scope, the price correction will cause the North American supply 'party' to mark a pause; it will not bring it to an end.

How low the market's floor will be is anybody's guess. But the sell-off is having an impact. A price recovery - barring any major disruption - may not be imminent, but signs are mounting that the tide will turn.

Barring a disorderly production response, it may well take some time for supply and demand to respond to the price rout.

If half of this took place in the OECD, stocks there would approach 2,900 million barrel and possibly bump against storage capacity limits.

The resulting downward price pressure would raise the risk of social instability or financial difficulties if producers found it difficult to pay back debt. Continued price declines would for some countries and companies make an already difficult situation even worse.