Crude-oil prices could fall even further as the world’s vast oversupply of petroleum only got worse in January with a surge in production from OPEC, a top global energy monitor International Energy Agency (IEA) said yesterday.
Dr Fatih Birol, executive director of the Paris-based IEA, warned that low oil prices could pose a threat to energy security as investment sinks in the sector, putting the world increasingly at the mercy of the geopolitically less stable Middle East for supplies.
Crude oil prices spiralled lower in January with what the IEA called “brimming stockpiles” pushing global benchmarks below US$30 a barrel. Yesterday, Brent crude for April delivery was trading at US$32.80 a barrel and US crude was at US$29.93, showing little let-up for prices.
The IEA cast doubt over a recovery for oil markets in its latest monthly report on Tuesday, saying that global oil demand growth, which now stands at 1.17 million barrels per day (bpd) following a five-year high of 1.6 million in 2015, is likely to decline this year.
Worryingly for market watchers fearing a global slowdown, oil demand growth was to be “pulled down by notable slowdowns in Europe, China and the US.
Early elements of the projected slowdown surfaced in the fourth quarter of 2015,” the IEA said.
On the supply side, the IEA has forecast a decline in non-OPEC producers. These producers, such as those in the US, have higher production costs and have tended to respond to the lower oil price by cutting production, closing rigs and cancelling exploration projects. Oil majors have seen profits plunge on the back of lower oil prices too.
The IEA said that global oil supply dropped by 200,000 barrels a day to 96.5 mb/d in January “as higher OPEC output only partly offset lower non-OPEC production.”
Showing the decline is not set to reverse any time soon, non-OPEC supplies are projected to decline by 600,000 barrels a day to 57.1 mb/d in 2016.
On the contrary, OPEC crude oil output rose by 280,000 barrels a day in January to 32.63 million barrels a day as output from Iran.
Freed from international sanctions that restricted its oil production, Iran came back online and Saudi Arabia and Iraq “all turned up the taps,” the IEA said. In fact, oil supplies from the group during January were nearly 1.7 mb/d higher year-on year.
With oil prices continuing to defy gravity, speculation has mounted over how low oil can actually go. The IEA said that while some commentators were too bearish, optimists had to look at the cold hard facts affecting prices.
“Perhaps some of the more fevered forecasts of oil prices falling to as low as $10 a barrel are extreme and better days do lie ahead for oil prices. However, before victory over the bearish forces is declared we should look at the main factors driving this optimism.”
There had been hopes that OPEC and non-OPEC producers could come to a deal to cut output but the IEA noted that this was just pure “speculation” at this moment. “It is OPEC’s business whether or not it makes output cuts either alone or in concert with other producers but the likelihood of coordinated cuts is very low. This removes one driver of bullishness.”
Another widely held view is that OPEC production, other than Iran, will not grow as strongly in 2016 as it did in 2015 but the IEA said that “although it is still early in the year, Iraqi output in January reached a new record and it is possible that more increases could follow.”
“Iran has ramped up production in preparation for its emergence from nuclear sanctions and preliminary data suggests that Saudi Arabia’s shipments have increased. Thus, another driver might be removed.”
Lastly, it said that hopes that demand growth would receive a boost from the collapse in oil prices were also misplaced, particularly given concerns over a slowdown in emerging economies in Brazil, Russia and China.
“If these numbers prove to be accurate, and with the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term. In these conditions the short term risk to the downside has increased,” the IEA said.
The IEA said the world will store unwanted oil for most of 2016 as declines in US output take time and OPEC is unlikely to cut a deal with other producers to reduce ballooning output, said the energy watchdog.
The IEA said investment in oil supply had dropped by 20 per cent last year, with a further drop of at least 16 per cent expected this year, making the first consecutive two years of declining investment in the industry’s history.
Sustained low prices around current levels would also cause higher cost projects to be cancelled or delayed, with the result that the share of world production from the only major low-cost region, the Middle East, would see its share of the market rise from about half at present to 75 per cent, he said.
“The geopolitical developments in the Middle East today may mean that low oil prices may not necessarily help to improve oil security,” Dr Birol said in an interview during a visit to Canberra at the invitation of federal resources and energy minister Josh Frydenberg.
Dr Birol said it was a “grave mistake” to overlook the risks that depressed oil prices posed for energy security, and suggested governments may need to do more to relieve pressure on the sector, through cutting taxes or royalties, for example, should oil prices stay low beyond this year.
He does not rule out further testing of last month’s lows in oil prices of around US$27 a barrel through this year, saying the market was “awash” with oil while demand is “weak” compared with last year.
“I would be surprised if we see a strong push this year upwards,” he said, assuming no significant change in economic and geopolitical conditions.
“We may well see throughout this year—2016—we continue to have downward pressure on prices: the markets are awash with oil and demand is not very strong in order to provide upward pressure,” Dr Birol said.