In a recent analysis of the International Energy Agency’s (IEA’s) “Oil Market Report” for March, Global Hunter Securities’ (GHS) macro strategist Richard Hastings described the investment bank’s current view of the industry as “appropriately guarded.”

While the IEA projected in its report that global demand for crude oil could reach a new high of 94.67 million barrels per day (MMbbl/d) in the fourth quarter of this year, the agency also said that demand gains for the first quarter, up 1.01 MMbbl/d year-over-year (yoy), may not be sustainable or an indication that demand is truly rising to match production. Rather, the GHS analysis said the gains may be “associated with ‘opportunistic buying’ and ‘storage plays’ and are ‘less sustainable than that driven by underlying economic growth.’ ”

IEA increased its demand growth rate for the year by 75,000 bbl/d, to the rounded figure of 1.0 MMbbl/d. Demand growth for the year is being forecast at 1.07%, an increase of 990,000 bbl/d from 2014 to an expected 2015 demand total 93.5 MMbbl/d. The new figures would reduce the yearly growth rate, from the same quarters of 2014, to an average of 1.07% yoy, Hastings said. GHS expects the IEA reduced the rate to provide “flexibility to future demand growth rates to lower them toward more conservative growth rates, perhaps closer to 850,000 [bbl/d] assuming global conditions worsen.”

The IEA also noted in its report that crude oil storage capacity in the U.S. is likely to be tested, even when the refinery maintenance season ends, according to the GHS analysis. While increased refinery output could slow storage builds during the second quarter, the builds will still continue and “would inevitably lead to renewed price weakness, which in turn could trigger the supply cuts that have so far remained elusive.”

However, IEA also increased global refinery throughput rates, GHS said, partly in response to increased demand for refined products. IEA forecasts throughputs of 77.8 MMbbl/d during the first quarter and 77.3 MMbbl/d during the second quarter. The agency noted stronger product demand in Europe recently, with 3.2% growth at the end of 2014 and 0.9% growth in January.

Near-Term Outlook

GHS expects that these factors will work to drive U.S. production down toward zero growth by May, the analysis said. The bank also expects crude prices to decline again, with extremely wide differentials between Brent crude and West Texas Intermediate (WTI) leading to technical trading events, “where Brent is bid higher, pulling up WTI front-month futures along the way,” the analysis said. Bakken and Williston crudes are expected to remain especially challenged.

A storage surplus may lead to an increase in storage costs at Cushing, Okla., Hastings said in his analysis. To mitigate that possibility, operators are already cutting operating expenses to prepare for rising costs and reduced revenues. The increased costs are therefore unlikely to contribute to a decline in production, he said. If storage limits at Cushing are reached, which could in late April or early May according to Hastings, some producers likely would halt production temporarily. However, Hastings noted that “credit requirements will encourage most producers to resume all-out production once storage capacity opens up,” which would keep the risk of tight storage capacity high for a longer period of time.

The GHS analysis also warned of the threat of overseas conflict to future crude oil prices. “The risk of supply disruptions in the Mediterranean and Mideast are increasing, and that conflict is now so pervasive and contagious that we would be foolish to ignore its pernicious and insidious impact upon crude oil prices in the future,” Hastings concluded.

Contact the author, Caryn Livingston, at clivingston@hartenergy.com.