The global oil market is now gradually getting back on its feet after three years of a palpable imbalance between supply and demand and prices hitting rock bottom, according to a report by the International Energy Agency (IEA). Interestingly, prices are now seeing improvement thanks to many reasons, foremost of which is the drop in oil stocks by 17.2 million barrels last March among both member and some non-member states of the Organisation for Economic Co-operation and Development (OECD) as well as the Opec agreement between producing countries to cut output by 1.8 million barrels until June.

Producing countries are fully committed to cutting output and there are now strong indications the agreement will be extended, especially after the GCC states expressed their initial approval to do so. This sent a positive message to the global markets which, in turn, responded quickly and resulting in a Brent crude barrel exceeding $55 (Dh202) last week.

Moreover, the agreement is expected to have a deeper effect during the third quarter due to the prospect of a decline in exports of some producers such as Iran, which used up most of its reserves and saw a decline from 28 million barrels to 4 million after the lifting of sanctions. This enabled it to boost exports by enhancing oil production and using its offshore inventory accumulated due to the sanctions.

Although expectations herald an oil demand growth this year by 1.32 million barrels a day after a slight drop of 40,000 barrels a day, the vast output reduction by 755,000 barrels a day will help bring back the balance between supply and demand, as referred to by the IEA report. In addition, the OECD member states will have to replenish their oil reserves over the course of coming months to ensure they are able to meet their needs, especially against the backdrop of the unsettled conditions in the Middle East, which is another assisting factor that will help rebalance the market and stabilise prices.

Based on historical data, oil prices usually get better in the third quarter than in the second due to the demand growth, but with some exceptions due to possible geopolitical developments like what happened during the Second Gulf War and the US invasion of Iraq. It is true there are some warnings of possible oil production surge by the US after increasing its shale platforms. But that needs some time and the possible demand and stock growth will absorb some of the expected production upturn there.

Therefore, most economic analysis — including by the IEA and Opec — indicate that the global market will restore its balance, even though we expect some fluctuations due to geopolitics and the non-stop speculative buying and selling.

Obviously, the market balance will reflect positively on the overall economic developments in oil producing countries and lead to improved financial conditions. Yet, it will take time before becoming apparent.

This means most of the economic and financial difficulties incurred over the last three years can be overcome by 2018, particularly in countries that enjoy resilient financial conditions as evidenced by their ability to manage resources and financial policies in recent years.