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A glut of oil will emerge next year if the peace deal in the Middle East holds, the International Energy Agency predicted on Wednesday, as crude production surges in the wake of the Iran conflict.
The IEA’s monthly report on the oil market took its first look at the aftermath of the war, as the US and Iran prepare to sign an interim peace deal on Friday that will extend the current ceasefire for 60 days.
There would be a “gradual” resumption of oil flows from the Gulf this year as countries started to revive oilfields that had been shut for months, IEA analysts said. Production would then rise by 8mn barrels a day to 110mn b/d by next year, far ahead of a “relatively modest” 2mn b/d rise in global oil demand, they added.
This will create a “significant overhang” that “may provide a welcome respite to the market and an opportunity to replenish depleted inventories, or to build new strategic reserves”. The agency noted oil stocks in OECD countries had now fallen to their lowest level since 1990.
Oil prices have fallen sharply since the deal between Washington and Tehran was announced at the weekend. Brent crude, the international benchmark, was trading at about $79 a barrel on Wednesday, down from about $87 at the end of last week and a peak of $126 a barrel at the end of April. West Texas Intermediate, the US benchmark, was trading just above $76 a barrel, down from a peak of just under $120.
Countries such as the United Arab Emirates, which left the oil producer group Opec during the crisis, are poised to expand production, while Saudi Arabia has said it can return to its prewar production levels in just three weeks. Meanwhile, the US, Brazil and Venezuela have all increased their production in recent months in response to the war.
While the recovery from the crisis is yet to begin in earnest, oil traders have sold heavily since the interim deal was announced on Sunday. Benchmark Brent crude stood at under $79 a barrel on Wednesday, its lowest level since the early days of the war.
Fatih Birol, the IEA’s executive director, previously described the supply shock from the conflict as the biggest energy crisis in history, after the closure of the Strait of Hormuz export route removed more oil from the market than the twin oil shocks of the 1970s and Russia’s 2022 invasion of Ukraine combined.
Despite the loss of supply, the price of Brent crude never came close to the record high of $147 a barrel set in 2008, as the US regularly raised hopes of a breakthrough in negotiations, emergency stocks cushioned the market and countries, especially in Asia, dramatically scaled back their purchases.
The IEA noted that oil prices had already plunged between May and mid-June, as traders held out for a peace deal and as China and Japan sharply reduced their buying by a combined 6mn b/d.
China drew down its oil reserves rather than importing more oil, but the IEA also said the country’s demand for crude fell by around 1.3mn b/d in April and by a further 820,000 b/d in May. “This rapid deceleration places China close to the epicentre of global demand destruction,” said the report.
It said there was evidence that China’s huge fleet of electric vehicles helped reduce its dependence on oil, with government data showing a 55.6 per cent year-on-year increase in charging on highways during the five-day May holiday, equivalent to a drop of 400,000 b/d of oil demand just on the road network.
The IEA said concerns over a shortage of jet fuel had eased after refineries boosted their production to record levels.
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