Prospects for the long-sought rebalancing of oil markets are rapidly fading, sending crude prices and share prices tumbling Tuesday.
In another bleak forecast for the battered industry, the Paris-based International Energy Agency said on Tuesday that a weakened global economy has sharply reduced the growth in crude demand, while producers in the Middle East continue to pump oil at record levels.
As a result, oil markets won’t come back into balance until the end of 2017 unless there are unanticipated outages like last spring’s fires that shut more than one million barrels a day of production from the oil sands, said the IEA, which advises rich countries on energy policy.
The Organization of the Petroleum Exporting Countries (OPEC) released its own gloomy report on Monday, pointing to stronger-than-anticipated oil production from non-member states, notably U.S. shale producers.
Traders reacted sharply to the two reports. The benchmark U.S. crude, West Texas intermediate, fell as much as 3 per cent before settling down $1.39 at $44.90 (U.S.) per barrel, while Brent crude fell 2.5 per cent to $47.10.
Oil company stocks also fell broadly and sharply on Tuesday, with Crescent Point Energy Corp. down 5.9 per cent, Canadian Natural Resources Ltd. off 3.8 per cent, Cenovus Energy Inc. down 3.7 per cent and Suncor Energy Inc. off 1.8 per cent.
In its monthly report, the IEA said global oil demand is slowing more dramatically than anticipated after solid growth in 2015 due to a global economic slowdown, with weakness in key markets.
“With the price of oil at current levels, one would expect supply to contract and demand to grow strongly,” said the IEA. “However, the opposite now seems to be happening. Demand growth is slowing and supply is rising. Consequently, stocks of oil in [industrialized] OECD countries are swelling to levels never seen before.”
Global oil demand is estimated to have grown by just 800,000 barrels a day in the third quarter of 2016, down from an increase of 2.3 million barrels a day in the third quarter of last year.
“The two biggest concerns are in China and Europe,” IEA senior economist Matthew Parry said in an interview.
In China, oil demand growth – once the engine of the commodity boom – has “virtually stopped” as the country pursues a restructuring away from heavy industrial activity, Mr. Parry noted. While there were some issues involving flooding and temporary shutting down of polluting industries ahead of this month’s Group of 20 leaders summit, the IEA sees demand for petroleum products growing by less than 4 per cent in the final three months of this year, compared with more than 6 per cent in the corresponding period of 2015.
Europe saw some significant demand growth in 2015 as lower prices drove demand, but that stimulative impact has played itself out. Key economies like France and Italy are experiencing weaker growth, and concerns over Britain’s vote to leave the European Unions continues to undermine confidence.
“There is a general gloom about the European countries right now, and Brexit is another nail in the coffin,” Mr. Parry said.
The slump in prices has cut into non-OPEC production. The U.S. energy agency said this week that American oil production averaged 9.4 million barrels a day in 2015, but that is due to fall to an average of 8.8 million this year and 8.5 million in 2017. Still, the agency has raised its forecast for 2017 production, pointing to higher drilling activity, rig efficiency, and well productivity than had been expected.
While non-OPEC production is falling in the U.S. shale fields and international deep water plays, the cartel’s biggest producers are running full out.
Since May, OPEC crude supply has risen by 640,000 barrels a day led by record output from Saudi Arabia and big increases by Kuwait and United Arab Emirates, which both produced at record levels in August. With declining U.S. output, Saudi Arabia reclaimed its position as the world’s largest oil producer, a spot the United States held since April, 2014.Report Typo/Error