The International Energy Agency reversed its forecast for global oil on Tuesday. While last month’s report indicated that there would be no global oil surplus in 2017, Tuesday’s assessment projected that the oil surplus would continue for a fourth straight year.
The agency held its predictions for demand growth steady at 1.2 million barrels per day, but cut its forecast for 2016 down from 1.4 million barrels per day to 1.3 million.
Why the change? According to the IEA, one immediate cause was a fall in demand during the third quarter, particularly in China and India. This was compounded by increased production, as OPEC and non-OPEC countries pumped more oil. Kuwait and the United Arab Emirates hit record levels of production, and Iran had higher output than any time since the lifting of sanctions.
The report was a major change for the IEA, which had hoped to see a new equilibrium between supply and demand.
“Supply will continue to outpace demand at least through the first half of next year. As for the market’s return to balance — it looks like we may have to wait a while longer,” the IEA said in its report.
Since mid-2014, when oil prices were over $100 a barrel, the value of a barrel had been on the decline, hitting $30 at the beginning of 2016. Now, with both the IEA and OPEC predicting a glut — and with production showing no signs of stopping — oil prices are again on the decline. Since the report’s release, West Texas Intermediate crude is down 1.97 percent, at $45.38.
If over-supply is the problem, why are producers pumping more oil? For OPEC countries, it’s part of a two-year-old strategy to protect their share of the market against non-OPEC competitors. Countries such as Saudi Arabia, which can pump oil very cheaply, may hope to push their competitors out of the market. OPEC members Iraq and Kuwait are looking to increase their share of the pie. Outside OPEC, Iran has been ramping up production in a quest to hit pre-sanction levels and revive its economy.
OPEC’s policy of protecting market share has been troublesome for some of its members. Inflation linked to lower oil prices has threatened living standards in Angola and Venezuela, with electricity rationing and skyrocketing food prices. In Nigeria, currency controls that prevent inflation have imperiled trade. Earlier this year, United Airlines cancelled its only flight to Africa, a Houston-Lagos route that had served energy-sector customers. These three countries, along with Libya, joined forces to press for production cuts in April 2016. Their efforts failed to convince other OPEC members to even slow down production.
However, the policy looks set for review – and possibly revamping – at the International Energy Forum in Algiers at the end of September. Led by Saudi Arabia, OPEC plans to hold talks with competitor Russia, in a search for ways to boost oil prices. Some have suggested that producers will finally agree to cap output. With all the competing interests at stake, such a move will not be easy.
Meanwhile, low prices have produced savings at the pump for global consumers. In January, Deutsche Bank economist Torsten Slok projected that these savings would eventually percolate through to the rest of the US economy, prompting growth. US shale production is expected to rebound in the second half of 2016.