Unseasonably warm weather and rising supply will keep the crude oil market oversupplied until at least late 2016 and could push the price below its current 12-year lows, the International Energy Agency (IEA) said on Jan. 19.
The addition of Iranian supply to a market where production looks set to outpace consumption for a third year in a row could not come at a worse time for crude oil exporters, who are grappling with prices at their lowest in more than a decade.
Brent crude futures have fallen to their lowest level since late 2003, tumbling below $30 a barrel, after OPEC said in December it would not cut output to halt the price slide despite global oversupply.
The IEA, which issues regular reviews of the health of the energy market, said more price weakness could lie ahead as a result.
"Although we do not formally forecast OPEC oil production, in a scenario whereby Iran adds 600,000 barrels per day to the market by mid-year and other members maintain current output, global oil supply could exceed demand by 1.5 million barrels per day in the first half of 2016," the agency said in a monthly report.
"While the pace of stock-building eases in the second half of the year as supply from non-OPEC producers falls, unless something changes, the oil market could drown in over-supply. So the answer to our question is an emphatic yes. It could go lower."
Responding to Tehran's compliance with a nuclear deal, the U.S. and other major powers have revoked international sanctions that sharply cut Iran's oil exports.
Warm winter weather around the world cut global oil demand growth to a one-year low of 1 million barrels per day (MMbbl/d) in the fourth quarter of 2015, down from a near five-year high of 2.1 MMbbl/d in the third quarter.
The IEA left its estimate of growth in global demand for 2016 unchanged from its previous monthly report at around 1.2 MMbbl/d.
"We conclude that the oil market faces the prospect of a third successive year when supply will exceed demand by 1 million bpd and there will be enormous strain on the ability of the oil system to absorb it efficiently," the IEA said.
With the world economy slowing, the IEA said it had cut its forecast for 2016 OPEC crude oil demand by 300,000 bbl/d to 31.7 MMbbl/d.
Iran has said it will raise output by an initial 500,000 bbl/d now that international sanctions have been lifted, but the IEA said it believes the increase will be of a more modest 300,000 bbl/d by the end of the first quarter of 2016.
The IEA is sticking with its forecast for a decline of around 600,000 bbl/d in non-OPEC output, which it said had been surprisingly resilient in the face of tumbling crude oil prices.