Crude Economics
Low Oil Prices Are Here to Stay

At least, that’s the impression the International Energy Agency (IEA) is giving with its latest report that predicts, among other things, that the oversupply in the global oil market will persist through the end of next year. Prices plunged to six year lows this week, less than half of their levels last summer, on tepid demand in Europe and Asia and booming American and OPEC supplies. The WSJ reports that, though the IEA’s report doesn’t paint a worst-case scenario, it does claim the oversupply has staying power:

The IEA did warn that the oversupply is likely to persist as global production “continues to grow at a breakneck pace.” […]

Many, however, are expecting further selling in the days to come. The IEA said that many in the industry see oil prices staying lower for longer as “muscular pumping” from the Organization of the Petroleum Exporting Countries’ top producers Saudi Arabia and Iraq is adding to the global glut.

“While a rebalancing has clearly begun, the process is likely to be prolonged as a supply overhang is expected to persist through 2016—suggesting global inventories will pile up further,” the IEA said.

 

Contributing to the global oversupply will be Iranian exports, due to be unleashed in the coming months as Western sanctions are lifted as part of the nuclear deal (if, that is, the deal goes through). If and when that happens, the country could begin to increase its daily oil production by as many as 730,000 barrels, according to new IEA estimates. “While significantly higher production is unlikely before next year, oil held in floating storage—at the highest level since sanctions were tightened in mid-2012—could start to reach international markets before then”, the report said. On the whole, the country could increase total monthly output from July’s 2.87 million barrels per day to 3.4-3.6 million “within months” of sanctions relief. The IEA’s estimates are more restrained than Iran’s own, but nevertheless they provide further evidence that the global oil glut is here to stay.

But while it appears that the supply side of the market will keep prices from rebounding significantly in the near future, a forecasted increase in demand should help stop the slide. This is, after all, a buyer’s market, and global demand is expected to increase at its fastest rate in five years in 2015. For sellers like petrostates and American shale producers, however, the picture is grim, as bargain rates seem here to stay.

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