A sustained supply glut has maintained Brent oil prices through the first five months of 2015 at some 47% lower than the same period in 2014. Industry observers expect low oil prices to eventually take supply out of the market and drive a price correction.
So, when will this happen? To-date, supply appears unaffected – latest figures from the EIA indicate that US production has risen almost 13% in the last 12 months. Saudi Arabia is much the same, production has hit a record rate of 10.3 mb/d. Many of the projects committed to over the 2011-2014 period (where we saw record levels of E&P Capex) are only just starting to come into production due to the long lead-times.
Returning off-market crude has further boosted supply. Political disruption notwithstanding, Iraqi oil production has hit new highs in 2015, while recent announcements by the Ministry of Oil (MOO) show crude exports in May hit record levels for the second consecutive month. What with OPEC’s 5th June meeting reaffirming the cartel’s decision to hold crude production at 30 mb/d, it is hard to see a supply-led oil price recovery any time soon.
Oil price recovery will instead hinge on growth in energy demand and, by association, economic growth. However, in April this year the IMF reported an expectation for 2015 of ‘moderate’ growth of 3.5% with “weaker prospects for some large emerging market economies”.
According to BP’s Energy Outlook 2035, liquids demand growth to 2020 will be focused outside of Europe and North America, with China playing a large part. Total growth in oil demand is expected to be 6%, while DW’s D&P forecast indicates supply growth of 5% over the same period. It follows logically that prices will recover, but that recovery is likely to be slow and gradual.
Matt Adams, Douglas-Westwood London
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