Oil Markets: Fasten Your Seatbelts
The spot price of Brent crude oil reached $115 per barrel in June 2014 and then began to decline. In March of this year, it was down to $52, a decline of 55 percent. The price recovered somewhat, rising to $66 in early May. With the tentative agreement with Iran concerning its nuclear facilities, the price began to fall once again in anticipation of a significant increase in Iranian oil exports into a market already flooded with oil. In late August, the Brent spot price was down to $41.69, though it has since recovered and stood at $53.40 at the close of the market on August 31.
How can one characterize what will happen in oil markets going forward? To parphrase Bette Davis’ character, Margo Channing, in the 1950 movie “All About Eve”, perhaps we might say: “Fasten your seatbelts. It’s going to be a bumpy year or two.” There are a number of factors that affect the price of oil in the short-term, including reported changes in oil inventories, the value of the dollar, announcements of OPEC production plans, reports of economic slowdown (or more rapid growth) in major oil consuming countries like China.
It is nearly impossible to pick out when an actual, longer-term turning point occurs. For this reason, most energy analysts focus on longer-term trends in supply and demand. In 2014, consumption grew slowly and the increase in world oil production exceeded demand by 1 million barrels of oil per day (mm b/d). Note that U.S. oil production grew by 1.26 mm b/d in 2014. Without the increase in U.S. oil production last year, the increase in world oil consumption would have outpaced the increase in production.
World oil production continues to increase, but we are now seeing a faster rate of growth in consumption due to economic growth and to the (lagged) response of consumers to lower oil prices. Oil inventories are very high and the price of oil is expected remain relatively low this year and well into next year. By the end of 2016, however, the International Energy Agency (IEA) expects that the balance between supply and demand will tighten as the growth in non-OPEC oil production declines in response to the low price of oil and as world oil consumption continues growing. The IEA projects that world oil consumption will be 3 mm b/d higher in the 4thquarter of 2016 than it was in the 4th quarter of 2014. As the balance tightens, the price of oil should begin to rise at a steadier rate.