The International Energy Agency (IEA) released its oil market report for August on Wednesday showing that the global demand for oil is expected to grow by 1.6 million barrels a day (mb/d).
This represents an increase of 0.2 mb/d from their last report and indicates that the demand for oil is growing at its fastest pace in five years.
Under normal circumstances, a price rise could be expected to follow the report which says that the world’s oil supply fell by 0.6 mb/d in July. The caveat here is that non-OPEC production fell while crude production by the OPEC members remained steady at levels close to a three year high.
OPEC crude supply for July declined by 15 kb/d (kilo or thousand barrels a day), to a total of 31.79 mb/d on the back of a drop in Saudi Arabian production which offset record high production from Iraq and increased flows of crude from Iran.
Lower global oil prices have taken their toll on non-OPEC crude supply while production there is expected to be sharply lower than the 2014 record of 2.4 b/d and is expected to come in at 1.1 mb/d for 2015.
The IEA also expects the OPEC crude supply to increase to 30.8 mb/d in 2016, an increase of 1.4 mb/d on this year’s forecast, due to an increase in demand accompanied by a drop in production from non-OPEC producers.
The demand for oil has been fuelled to a large degree by consumers in the U.S. who have taken advantage of the lower prices to buy less fuel efficient automobiles, such as SUVs and light trucks, with an increase in leisure use. The IEA report indicates that consumers were responding to the lower oil prices while macroeconomic prospects had risen beyond expectations.
Meanwhile, the OPEC production policy responsible for driving down the oil price is seen as an attempt to push down supplies from non-OPEC producers. The IEA says that lower output from non-OPEC producers will only be felt during next year. Most of the decline in non-OPEC production will be at Russia’s expense as U.S. supplies are expected to continue growing by about 19 kb/d during 2016.
The IEA says in its report, “Oil’s plunge below $50 barrels per day from triple digits a year ago has seen demand react more swiftly than supply. Against this backdrop, many participants in the oil industry have adopted a new mantra - lower for longer.”
The energy agency believes that a process to balance the supply and demand ratio is underway, but that the process will be a prolonged one as the supply overhang is expected to continue through 2016, indicating that global inventories continue to pile up even further as lower prices remain the order of the day.
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