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Oil Supply Growth Plunges and Prices Rally

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Oil’s oversupply has been the main driving factor behind the commodity’s low prices, but now that there’s talk of a production freeze that could quell the surplus, prices have rallied.

Brent crude, the global benchmark, rose to $33.01 Monday—a two-week high, sending U.S. stocks higher, too. The S&P 500 Index was up more than 27 points to 1,945 Monday afternoon.

The global surplus will last at least into 2017, but supply growth is plunging as the period of low prices “takes its toll,” the International Energy Agency (IEA) said Monday.

According to the energy organization’s medium-term market report, U.S. oil output is falling steeply for now but the market will start to rebalance next year. By 2021, the U.S. and, now that sanctions have been removed, Iran—which would not commit last week to curbing its oil output—will lead production gains.

“While oil prices should start to rise gradually once the market begins rebalancing, the availability of resources that can be easily and quickly tapped will limit the scope of rallies—at least in the near term,” the report noted.

However, the IEA report warned that an oil price spike could be on the horizon closer to 2021 because of insufficient investment.

“It is easy for consumers to be lulled into complacency by ample stocks and low prices today, but they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not-too-distant-future,” IEA executive director Fatih Birol said.

As much as 4.1 million barrels a day could be added to global oil supply between 2015 and 2021, down steeply from 11 million barrels per day growth the 2009-2015 period saw.

“The drop in supply growth comes as upstream investment dries up in response to the current glut that is pressuring prices,” the IEA report noted.

Investments in oil are expected to fall a further 17 percent this year, on top of a 24 percent decline in 2015, which marks the first time since 1986 that investment has fallen for two straight years.

U.S. production is expected to reach 14.2 million barrels a day by 2021, though it will first fall in the short term.

“The United States remains the largest contributor to supply growth during the forecast period, accounting for more than two-thirds of the net non-OPEC increase. Global oil demand is expected to grow at an average of 1.2 million barrels a day through 2021. Indian consumption will tick up and Chinese demand growth will cool “in tandem with the economy,” according to IEA, and global oil trade continues to pivot toward Asia.

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