Crude prices retreated Tuesday amid fresh signs that global producers will continue to oversupply the weakened world economy over the next year, leaving little prospect for a sustained recovery.
In separate reports Tuesday, the International Energy Agency and Citigroup Global Markets Inc. issued bearish outlooks that see global inventories continuing to build through 2016, with Citigroup analysts forecasting another sharp drop in prices before the end of the year.
Crude prices staged a mini-rally last week but have given back much of those gains. After a sharp sell-off on the holiday Monday, West Texas intermediate fell 44 cents (U.S.) on Tuesday to $46.66 a barrel.
"The market appears to be setting itself up for another sell-off, with the looming questions being when and how far," Citigroup analysts led by vice-president Edward Morse said in a report. The New York-based bank has one of the most bearish outlooks on Wall Street, forecasting WTI prices of $39 in the fourth quarter and averaging only $48 next year.
They said inventories are continuing to rise, while U.S. production is not falling as quickly as the market expects and demand is weaker than anticipated.
The Paris-based International Energy Agency (IEA), which advises developed countries, expects the pace of demand growth to ease next year after sharp gains spurred by the big slump in prices that occurred in late 2014 and early 2015. The agency said demand growth is expected to hit a five-year high this year of 1.8 million barrels a day, but will slow to 1.2 million b/d next year due to weaker global growth – a figure that Citigroup argues is excessively bullish.
The United States and China remain the twin pillars of demand growth, the IEA said. Over the summer, U.S. gasoline consumption rose by 400,000 b/d compared with the summer of 2014, as motorists took advantage of the steep decline in pump prices and a more buoyant economy.
And despite concerns about a slowing Chinese economy, the agency said demand grew at near double-digit rates in August, fuelled by an expanding fleet of passenger vehicles.
On the supply side, Saudi Arabia is expected to maintain high levels of production as it battles for market share against rivals Iraq and Iran, which is eager to boost production following a prolonged period of sanctions related to its nuclear ambition. The IEA estimated Iran could add 600,000 b/d of production if the nuclear deal it signed with leading Western countries is fully implemented.
With slower demand and rising Iranian production, oil markets will continue to be oversupplied throughout 2016. It remains unclear exactly how much crude Iran can muster in the short to medium term, further clouding the outlook for oil prices.
The market "still will be quite choppy until we see how much crude Iran can or cannot bring on stream once these sanctions are lifted, unless you get huge growth in demand," said Patricia Mohr, vice-president and commodity markets specialist at the Bank of Nova Scotia.
Still, some forecasters are convinced that oil prices have turned a corner and are unlikely to retrace lows seen in August, when WTI touched $37.75 a barrel.
"It's becoming less and less likely" that oil prices will see a substantial retreat from current levels, said Martin King, analyst at FirstEnergy Capital Corp. in Calgary. "As every day goes by, we're getting further and further into this correction."
Indeed, oil-patch deals have piled up in recent weeks as U.S. and world prices steadied, ending a standoff over valuations. Polish energy company PKN Orlen SA on Tuesday agreed to buy Calgary-based Kicking Horse Energy Inc. for $293-million (Canadian). Last week, Suncor Energy Inc. launched a $4.3-billion hostile bid for Canadian Oil Sands Ltd., its partner in the Syncrude Canada Ltd. oil sands project. Encana Corp. sold a package of natural-gas assets in Colorado for $900-million (U.S.) to a partnership led by the Canada Pension Plan Investment Board.
In Alberta, cash-starved oil sands companies have warned that uncertainty created by an ongoing review of energy royalties and the province's climate-change regulations could jeopardize future investments.