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No Rebound In Sight For Sliding Oil Prices

No Rebound In Sight For Sliding Oil Prices

Global oil prices have slid in recent weeks, a trend that shows no signs of changing in the immediate future.

The two main benchmarks for oil prices, Brent and WTI, hit their highest levels so far this year in June amid the initial onslaught in Iraq of the Sunni jihadist group Islamic State of Iraq and Syria (ISIS). Fears that the militant group would seize Iraqi oil fields pushed up prices.

Brent crude has now dipped below $100 per barrel, for the first time in over a year. WTI is trading around $92 per barrel, a 16-month low.

Prices have dropped for a few reasons.

ISIS’s advance has come to a halt and fears that Iraq’s oil production would be affected have abated.

Libya has brought some of its oil back online, with August production averaging around 538,000 barrels per day (bpd) -- more than double its average daily production from June. Libya’s National Oil Corporation says that production is now topping 800,000 bpd and could exceed 1 million bpd in October.

U.S. oil production also continues to rise. In June, the U.S. produced 8.5 million bpd, an increase of 500,000 bpd since the beginning of the year. Higher production continues to cut into imports, leaving greater supplies on the global market.

Perhaps most importantly, global demand has been surprisingly lackluster. The latest data from the U.S. Energy Information Agency (EIA) shows that refined product (gasoline, for example) inventories are increasing – an indication that production is overwhelming consumption.

A slowing Chinese economy is also putting a damper on crude oil prices. Weak economic data published by the Chinese government showed that China’s import growth slowed for a second straight month, suggesting the economy continues to cool.

Oil prices in dollar per barrel chart

The glut of supplies and weak demand is causing problems for OPEC, according to the cartel’s monthly report. OPEC lowered its demand projection for 2015 by 200,000 and in August, Saudi Arabia cut production by 400,000 bpd in an effort to stem oversupply.

As noted by Steve LeVine in Quartz, cheaper oil could present problems for oil producing countries, which generally rely on high prices to keep their national budgets in the black.

Iran, for example, needs a price of $136 per barrel to pay for its current levels of public spending. Other countries – Nigeria, Ecuador, Venezuela, Iraq – are all facing looming budgetary problems as their required “breakeven” prices are higher than what oil is currently selling for on the market.

Russia needs between $110 and $117 per barrel to finance its spending, which means the Kremlin can’t be happy as it watches Brent prices continue to drop. Combined with an already weak economy, Russia could see its $19 billion surplus become a deficit by the end of the year.

Moscow also won’t like the new set of sanctions the European Union said it will slap on Russia on Sept. 12, which include a devastating prohibition on international oil majors from working on oil and gas projects in Russia’s Arctic. The ban could halt billions of dollars’ worth of investments in Russia and cut into future oil production. ExxonMobil has already begun drilling a $700 million well in Russia’s Kara Sea.

Oil suppliers could be dealing with the problem of low prices for a while.

The EIA predicts U.S. oil production could increase by another 1 million bpd in 2015 to 9.5 million bpd, which would be a 45-year high. That would keep WTI prices as low as $94 per barrel and Brent at just $103 per barrel.

Saudi Arabia’s willingness to curtail production could prop up oil prices by decreasing supply, but it might not be as effective as Riyadh hopes. That’s because holding back production will also allow the world’s only swing producer to build back greater spare capacity. Higher spare capacity would allow the oil kingdom to step in at some point in the future if demand rises or supplies drop. This would likely have a calming effect on the markets, potentially wiping out the effect of decreasing production.

Absent a major new flare up of violence in an oil producing country -- which has become disturbingly commonplace -- oil prices look set to remain weak for quite some time.

By Nick Cunningham of Oilprice.com

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  • Roger Saul on September 11 2014 said:
    Can I read your "daily" columns?
    I just signed up for a Trial Membership on Oil Price.

    Is there a way to access your recent daily articles?
    OilPrice may be only once a week on Friday?

    I am trying to do a little day trading in Oil, and once a week is so late.....

  • Ahmad Tawfik on September 12 2014 said:
    Could it be that Isis is selling oil off captured Iraqi wells on the black market at much reduced prices.. .
  • Andrey Palyura on September 12 2014 said:
    Really nice analysis Nick! It should be a cold shower for us. (Russia). Usually it is very healthy procedure. Russia hopes for oil paradise should be changed. But we have a lot of hidden reserves. Main from them is non-efficiency. We need invest more in own technology, in own non-hydrocarbon production. In more accurate budget spending. We need to substitute our huge import, and at the end we need to sale less oil and save it for future. "Every cloud has a silver lining". My daughter is just 3 year old, when she will be 25, she would also need oil, and than her children.
  • Jörg Dürre on September 15 2014 said:
    Eia stated highest upstream cost for onshore to be 45 USD in Africa.
    If Iran "needs" 136 USD in comparison to middle east upstream cost of 17 USD this assumption is based on which total turnover?
    Even though the mineral oil guys do not want to hear it - the electrical solar power already beats the price of mechanical power from mineral oil, same holds true for heat if you combine wind or solar ecopower with heat pumps.
    The real and ultimate danger for the oilprice are the renewables which bring the energy market as it was to an end.
    As the finding costs are the major part, no further investments and therefore findings will lead to a big (temporary) advantage for Iran and Russia with their already discovered fields.
    The solution of some sociopath seems to bully those countries hard.

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