Oil Recovery Expected to Falter Though Supply Glut Shrinks

The world is burning through the oil supply glut that threatened to cripple the energy industry a few months ago, but spiraling coronavirus infection numbers are putting the recovery in jeopardy, the International Energy Agency said Wednesday.

In its monthly oil market report, the IEA said global oil supply in September was 9% below the pre-pandemic average of 2019. The amount of oil in expensive offshore floating storage fell sharply below its level in May, at the nadir of the global crude crisis, the agency said.

The report paints a picture of contracting supply, forecasting a four-million-barrel-a-day drop in inventories in the fourth quarter of this year from the third.

But that change in inventories is happening from record-high levels and the drawdown in oil stocks could falter in the months ahead, with Covid-19 cases sharply rising in the developed world and the prospect of renewed restrictions on movement, the Paris-based organization said.

The climbing case number "surely raises doubts about the robustness of the anticipated economic recovery and thus the prospects for oil demand growth," the IEA said.

Oil ticked up Wednesday after climbing Tuesday on bullish Chinese crude import data. Brent crude oil, the global benchmark, was up 1.5% at $43.09 a barrel and West Texas Intermediate futures, the U.S. gauge, rose 1.7% to $40.88 a barrel. The prices of both benchmarks are more than 6% higher than a month ago, with shutdowns prompted by U.S. hurricanes contributing to gains. But that price increase has plateaued this month, with coronavirus infection rates and rising supply from Libya concerning investors.

In the context of the Organization of the Petroleum Exporting Countries' monthly report released Tuesday, in which the cartel cut its 2021 demand forecast, the IEA's warnings about further coronavirus risk may concern investors. The agency slashed its demand forecast for the third quarter of 2020 by 200,000 barrels a day, but left its annual forecasts unchanged for this year and next.

Behind September's drop in supply has been a mixture of events causing outages among non-OPEC producers, such as maintenance in Brazil and strike action in Norway, the IEA said.

While U.S. supply dropped in August and is forecast to do so again in October -- hurricanes have forced precautionary closures of Gulf of Mexico production -- output increased in September, rising by 400,000 barrels from the previous month.

That said, supply losses from hurricane season and from further Norwegian industrial action in October will be more than offset by resurgent supply from Libya, the IEA said. The country's government has reached a deal with renegade Russian-backed commander Khalifa Haftar, who had blockaded production there for eight months.

The agency said it expects Libyan supply to rise to 700,000 barrels a day by the end of 2020 from 300,000 barrels a day at its current rate.

While Libya remains exempt from the OPEC+ supply cuts agreed upon six months ago, increased supply from the North African producer could provide a headache for the cartel, which is still planning to further ease production cuts on Jan. 1, the United Arab Emirates' energy minister said in an online energy forum on Tuesday.

The U.A.E. slashed its output by 440,000 barrels a day in September after the Gulf country surprised analysts during the summer by ramping up production. That contributed to an increase in compliance with the OPEC+ deal to 103% from 98% in August, the IEA said.

Write to David Hodari at David.Hodari@dowjones.com

  (END) Dow Jones Newswires
  10-14-20 1225ET
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