Ample crude supplies and a weak global economic outlook have pushed world oil prices to a 13-month low despite armed conflicts that have flared up in key producing regions.
Oil markets are "almost eerily calm" even as geopolitical risks abound in the Middle East and in other important energy regions, the International Energy Agency said in the August edition of its much-followed Oil Market Report.
The world is well supplied, after Saudi Arabia ramped up production past 10 million barrels a day, its highest in nearly a year, and its OPEC partner Libya eked out tentative gains. They have made up for losses in Iraq, Iran and Nigeria this summer, the IEA said. Meanwhile, North America's oil-production renaissance has hummed along unabated.
At the same time, the IEA cut its oil-demand forecast for 2014 by 180,000 barrels a day, after crude deliveries in the Americas and Europe in the last quarter sank by 440,000 barrels a day and the global economy underperformed previous expectations. It trimmed its outlook for all-important Chinese demand growth to 2.9 per cent from 3.3 per cent.
London-traded Brent crude fell $1.66 (U.S.) a barrel to $103.02 on Tuesday, after hitting an intraday low of $102.65, its lowest since July, 2013. West Texas Intermediate, the North American benchmark, fell 71 cents to settle at $97.37.
"Despite armed conflict in Libya, Iraq and Ukraine, the oil market today looks better supplied than expected, with an oil glut even reported in the Atlantic basin, where surprisingly steep demand contraction recently compounded the effect of relentless North American supply growth," the Paris-based IEA, the West's energy watchdog, said in its report.
More-than-sufficient oil supply and shaky demand data suggest that without geopolitical tensions, the market could turn even weaker than it is. The situation adds more pressure to a Canadian energy sector that had been on a major rebound for most of the first half of the year, but has watched as commodity markets have retreated in the past two months.
However, Saudi Arabia would remain a wild card in the equation, and could cut its production to protect prices, just as it has increased it this year, said Martin King, analyst at FirstEnergy Capital Corp.
Today's relative market stability puts into focus its capacity to adjust supplies when fellow OPEC members face threats to production levels. The shale revolution is playing into the mix with seemingly unstoppable growth in light crude supplies from regions such as the Bakken in North Dakota helping to push North America closer to self-sufficiency.
On the demand side, the IEA took its cue from the International Monetary Fund, which shaved three-tenths of a percentage point off its 2014 global gross domestic product growth forecast, putting it at 3.4 per cent. Demand growth is expected to pick up again in 2015 as macroeconomic conditions improve, it said.
"The effect of slack demand and ample supply from the places that count is that it reduces the potential for price spikes," said Judith Dwarkin, director of energy research at ITG Investment Research in Calgary.
"Five years ago, if we had things going on in Iraq such as they are now, things in Ukraine, the Gaza issue, Brent probably would have been much higher. But because supplies are growing outside of the Middle East now quite handily and demand growth still hasn't recovered to prerecession pace, I think that's taken some away from the usual geopolitical culprits," Ms. Dwarkin said.
In recent weeks, Islamist forces moved in on oil fields and exploration blocks in the Kurdistan region of northern Iraq, prompting foreign oil companies, including Exxon Mobil Corp., Chevron Corp. and Talisman Energy Inc. to evacuate staff. Meanwhile, Iran's oil output has also fallen gradually over the past three months.
Canadian oil and gas liquids output held steady in July at 4.2 million barrels a day, but the agency predicted output would rise in the fourth quarter as bitumen production from the Alberta oil sands resumes steady gains.
Ms. Dwarkin said it is likely the market may stray little from the current range as Northern Hemisphere refiners enter their end-of-summer maintenance season following two months of heavy production.
"The steam's going to come out of it over the next few weeks on the U.S. side of things, and on the Brent side of things, the ongoing geopolitical uncertainties I think are maintaining some kind of a floor," she said.