Oil prices plunged more than 2 percent on Tuesday after the IEA said that global oil demand is slowing.
In its latest Oil Market Report, the IEA downgraded its assessment for demand in 2016 to just 1.3 million barrels per day (mb/d), or about 100,000 barrels per day lower from its August report. The reasons for slower demand are multiple. Both China and India, which make up the bulk of demand growth, are “wobbling,” the IEA says. Then there are economic worries in other developing countries, which come on top of weak economic performances in Europe. And the “momentum in the US has slowed dramatically.”
Also, refiners are “clearly losing their appetite for more crude oil” as margins have shrunk, the IEA says. Without the robust activity from refiners seen earlier this year, crude demand is set to slow. The 100,000 barrel per day downward revision for the whole of 2016 comes as the IEA sees third quarter demand 300,000 barrels per day lower than its previous forecast.
But the Paris-based energy outfit says the “supply side is equally confounding.” Production continues to expand even as the oil industry has made painful cuts to investment. The U.S. has lost more than 1 mb/d in output from its April 2015 peak, and other non-OPEC producers have also seen declines, including China, and much of Latin America.
Still, OPEC countries have stepped into that void, capturing more market share. Iran, Iraq, and Saudi Arabia have dramatically scale up production. In the past two years, Iran and Saudi Arabia have each added 1 mb/d in additional supply. And Saudi Arabia, Kuwait, the UAE, and Iraq are all near all-time highs, the IEA concludes.
“I think it’s been very interesting the last few months because non-OPEC supplies are actually falling very fast,” Amrita Sen, chief oil analyst at Energy Aspects, told CNBC. But that has been almost entirely offset by higher OPEC production. “Unless and until OPEC production really comes back in, it’s hard to see how we break out of this range. I think $50 to $55, or let’s say $45 to $55, is really the new range now.”
Oil inventories “in OECD countries are swelling to levels never seen before” and in July OECD inventories “smashed through the 3.1 billion barrel wall.” The extraordinary levels of oil sitting in storage will kill off any price rally even when supply and demand do come into balance. And in one glaring projection, the IEA sees global inventories continuing to build through 2017, a sure sign that prices will struggle to gain ground anytime soon. With demand suddenly looking weaker than expected, and supply proving to be more resilient than expected, “it looks like we may have to wait a little longer” for the market to balance, the IEA says. Supply will continue to outpace demand through at least the first half of 2017. Related: Game May Not Be Over For Barnett Shale
OPEC also released its monthly report this week, and it sees the same trends emerging in the oil market. OPEC revised its estimate for non-OPEC supply upwards, seeing gains of 200,000 barrels per day in 2017 compared to a previous forecast for a 150,000 barrel-per-day decline. A big chunk of that could come from the Kashagan project in Kazakhstan, a $50 billion-plus white elephant that has plagued its owners Eni, ExxonMobil, Total, and Shell. The project is a decade behind schedule and vastly over budget, but it could come online in October and add 370,000 barrels per day by next year.
The takeaway message from the IEA report is that there is a new sense of bearishness creeping over the oil market. Prices have been unable to be sustained over $50 per barrel since the downturn began two years ago, and the IEA and other analysts are coming around to the notion that it will take longer than expected before higher prices arrive. The predictions are all the more remarkable because just a month earlier the IEA saw the market balancing as soon as the end of this year.
It wasn’t too long ago that the oil industry started to get used to the “lower for longer” mantra. The IEA is once again trotting out that refrain as market balance remains out of reach.
By Nick Cunningham of Oilprice.com
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