The price of Brent crude oil reached above $70/bbl early this week, the first time since the Organization of Petroleum Exporting Countries’ “market share” ministerial meeting in December 2014. The factors affecting this upward movement include the possible unravelling of the Iran nuclear deal and recent demonstrations in the country, disruption to Libya’s oil industry, and closure of the Forties pipeline system.
“Although these factors might have faded somewhat, there are others at work,” said the International Energy Agency in its January Oil Market Report. “The general perception that the market has been tightening is clearly the overriding factor and, within this overall picture, there is mounting concern about Venezuela’s production,” IEA said.
Production in Venezuela has been sliding for a long time, now half the level inherited by President Chavez in 1999.
“It is reasonable to assume that the decline will continue but we cannot know at what rate. If output and exports sink further other producers with the flexibility to deliver oil similar in quality to Venezuela’s shipments to the US and elsewhere, including China, might decide to step in with more barrels of their own,” IEA said.
The oil market is clearly tightening. In the latest three consecutive quarters, crude stocks fell by an average of 630,000 b/d, which was rare in modern history.
“A judgement as to whether the recent price strength is sustainable must take into account the rapid growth in global oil supply seen recently and which will continue through 2018,” IEA said.
Short-cycle production from the US is reacting to rising prices and IEA in the report has raised its forecast for US crude oil growth to 1.1 million b/d from 870,000 b/d. According to IEA, it is possible that shortly US crude production could overtake that of Saudi Arabia and rival Russia.
After adding in barrels from Brazil, Canada, and other growth countries, and allowing for declines in Mexico, China, and elsewhere, total non-OPEC production will increase by 1.7 million b/d. This represents, after the downturn in 2016 and the steady recovery in 2017, a return to the heady days of 2013-15 when US-led growth averaged 1.9 million b/d.
IEA expects oil demand to grow of 1.3 million b/d in 2018, a conservative number that acknowledges the current perception of healthy global economic activity, but also considers the fact that benchmark crude oil prices have increased by 55% since June and this can dampen oil demand growth to some extent.
