Oil prices may have finally bottomed out: IEA

Oil prices may have finally bottomed out after an unprecedented drop over the past 18 months, the International Energy Agency (IEA) said today, noting oil's "remarkable recovery" over recent weeks.

Recent sharp gains in the oil price, taking it to around $40 per barrel now from $28.50 in mid-January, do not necessarily mean that the worst is over, the IEA said in its monthly oil market report.

"Even so, there are signs that prices might have bottomed out," it said.

Oil had seen a dramatic fall since trading above $110 in mid-2014 to lows seen in January of this year, before staging a modest recovery to current levels.

Oil prices rebounded today following the report, with US benchmark West Texas Intermediate (WTI) for delivery in April adding 71 cents on the day to trade at $38.55 and Brent North Sea crude for May delivery rising 66 cents to $40.71.

CMC Markets analyst Jasper Lawler credited the IEA's outlook with sparking the oil price rise by calling for "a possible bottom".

The report was "bullish", added DNB Bank. "Undoubtedly, one of the reasons for the price strength is the monthly report on global supply/demand published by the IEA this morning," commented oil brokers PVM.

But there is a long way to go before supply and demand find a real balance, probably in 2017, the IEA said in its report.

Among factors supporting higher prices are talks among producers launched by Saudi Arabia, Venezuela, Qatar and Russia to freeze production, which the IEA said amount to "a first stab at coordinated action that is intended to stabilise prices" with the presumed aim of pushing oil up to $50 a barrel.

The outcome of negotiations is, however, uncertain and a big supply overhang in the oil market means it would have little impact in the months ahead.

"Later this month some oil producers are expected to meet to discuss a possible output freeze. We cannot know what this might be and in any event it is rather unlikely that an agreement will affect the supply/demand balance substantially in the first half of 2016," the report said.

Iran impact muted
Among other factors keeping a lid on oil supply, Iran's return to the market following the lifting of Western sanctions in January has been "less dramatic than the Iranians said it would be", the IEA said.

"Provisionally, it appears that Iran's return will be gradual," said the 29-nation agency that provides analysis on global energy markets.

The IEA said supply disruptions in Iraq, Nigeria and the United Arab Emirates, steady demand for oil and recent weakness of the dollar were other reasons favouring expectations of a price upturn.

Also, there are signs that high-cost producers, including of US shale oil, are lowering output as they can't cover their costs because of weak oil prices. Consequently, the IEA has lowered its output target for the US, Brazil and Colombia.

India to fuel demand
Global demand for oil is expected to grow by 1.2 million barrels per day (mb/d) this year, unchanged from the IEA's previous estimate.

But the agency said that risks are on the downside, with demand in the US expected to be flat and in China below that seen in recent years.

Most oil demand growth this year will come from India, smaller Asian countries and the Middle East, the IEA said.