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Low Demand, Increased Supply Conspire To Push Crude Prices Lower

Low Demand, Increased Supply Conspire To Push Crude Prices Lower

The price of Brent crude oil dropped to below $97 a barrel on Sept. 15, its lowest in 26 months, depressed by both a continuing oil glut and lower demand. This follows the previous week’s drop of U.S. crude to a 16-month low.

Many factors on both the supply and demand sides have contributed to this slump, most recently word that growth in key sectors of China’s economy had cooled in August, particularly factory output, which was at its slowest pace during the month in almost six years. Further, this may indicate that China’s huge economy could be on the verge of an even larger slowdown.

Related: This is the Oil Trade You Should be Making

Brent crude for October delivery fell as low as $96.21 per barrel, its lowest since July 2, 2012, then recovered a bit, but remained below $97. In the previous week, the price of October West Texas Intermediate dropped 17 cents to $91.50 per barrel on the New York Mercantile Exchange.

Analysts say the recent declines are all about high supply and low demand and were only accelerated by news out of China. One is Ric Spooner, chief market analyst at CMC Markets. “Economic growth in China is one of the key drivers of world growth and generally of oil demand,” he says. “It seems likely that [oil] demand growth won’t keep up with the growth in supply capacity.”

China reported a decrease in power generation for the first time since 2010. This followed last week’s estimates by the International Energy Agency that worldwide oil demand will drop in 2014 and 2015. It was the third consecutive month that the agency had cut its forecasts for demand. For 2014, it estimated growth of 0.9 million barrels a day, down by 65,000 barrels.

On the supply side, the United States is continuing to produce energy at record levels, and even strife-torn Libya is expected to increase oil production to 1 million barrels a day in October.

Even worse, Saudi Aramco and a partner, the Beijing-based energy company Sinopec, have begun testing a brand-new oil refinery in Yanbu on Saudi Arabia’s Red Sea coast that has a capacity of refining 400,000 barrels of oil per day. It could begin exporting oil no later than November.

Related: No Rebound In Sight For Sliding Oil Prices

The Yanbu facility is a twin of sorts of the Jubail plant on the Saudi Gulf coast, which is a joint venture between Aramco and the French oil company Total. It too has a capacity of 400,000 barrels per day and has been operating since September 2013.

The two plants were built to facilitate oil exports from Saudi Arabia: The Red Sea refinery would serve Europe and other Western customers, while the one on the Gulf would serve Asia. Right now, though, all they seem to be facilitating is a drop in the global price of oil.

By Andy Tully of Oilprice.com

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  • Tim Bilsky on September 16 2014 said:
    All this increase in supply and lack of demand, and we're still above $90/barrel and here in southwestern PA, around $3.45/gallon at the pump. Thank you, speculators for artificially keeping the price up, and thank you government for taxing oil to death and not adding a new refinery in this country for over 30 years. It's ironic that before 2005, it rarely eclipsed $50/barrel (inflation-adjusted), but the past three years, it's been $90+, and I would wager that we won't ever see a return to even the $70/barrel range. I don't want to hear the excuse of "China and India are growing," because they've been growing for over 15 years now. I'm convinced that government and speculators for the most part, have subverted the true market, and as a result, prices never fall below a certain level. I know it sounds like conspiracy theory, but is it when you look at the facts?...

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