In its latest monthly report the International Energy Agency suggests that the price of oil will remain at its present low state for at least a year and possibly longer.
The fall in prices over the past 12 months or more has been fairly brutal. In August 2014 Brent crude was selling at $100.46 per barrel but by August 2015 the same blend was worth only $48.46. A rally in the price seen earlier in the year has petered out and oil is again approaching the lows seen in January.
As ever the drivers behind the fall in price are complex but the picture of weakness is compelling, if a little surprising.
Importantly the EIA sees the world’s economy as strengthening and this is increasing oil demand. Overall daily oil consumption has risen by 1.6 mb/d and is expected to hit a rate of 95 mb/d by the end of 2015. The EIA sees this trend continuing “as economic growth solidifies and consumers respond to lower oil prices. Persistent macro-economic strength supports above-trend growth of 1.4 mb/d in 2016”.
The supply of oil is also responding to the pricing signals. Production is falling noticeably with the EIA stating that “world oil supply fell nearly 0.6 mb/d in July, mainly on lower non-OPEC output”. Within OPEC Saudi Arabia is easing back but Iraq is producing record amounts and Iran is beginning to increase its output as well.
However what is really depressing oil prices is the stocks held in reserve by both producers and consuming economies, indeed inventories of oil held in OECD economies rose by 9.9m barrels to hit an all-time high of 2.9bn barrels. This excess inventory will take more than a year to dissipate and may actually increase in the short-term.
The forces that caused the crash in prices seen over the past year appear to be unwinding, with higher demand in particular suggesting higher prices sometime in the future. Yet the EIA sees the effect of “muscular pumping” by the likes of Saudi Arabia earlier in the year as the creation of excess stocks, something that will delay any price increase well into 2016.
Excess stocks however, are a temporary phenomenon and purchasers of fuel should not assume that present prices will continue indefinitely.