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Despite tension in the Middle East, oil is still on a downward swing. What impact could the North American market feel from a prolonged oil price decline?
Oil’s fall has come hot on the heels of the restart of production from Libya’s largest oil field, along with higher output from Iraq. That’s unsurprising given that the commodity is typically hammered in the event of oversupply; however, considering the unrest in the Middle East, it’s a little odd that crude isn’t picking up some steam.
“Given that the world’s largest oil production region is in a state of crisis … it is remarkable that oil prices are so unmoved,” David Hufton, managing director of PVM, an oil brokerage in London, told Reuters.
Looking at the price drop, The Globe and Mail discounts the increase of US production from shale sources as being able to able to cap the price of oil, instead pointing to a market that is seeing similar behavior as the coal market: “demand is no longer increasing at the rare it once was.”
In terms of US oil consumption, one would typically expect to see figures in line with the country’s placeholder as the largest consumer of oil in the world. Unfortunately, US oil consumption is down 18.6 million bpd, a slide from 21 million bpd prior to the last recession. Meanwhile, European oil demand, according to the Globe, peaked over 20 years ago and has “fallen in each of the last five years.” Also of note is China, which isn’t picking up any demand slack as its economy shifts into a lower gear.
Along the same note, earlier this month the International Energy Agency (IEA) cut back its forecast for oil demand this year for the third month in a row. As The Wall Street Journal states, the Paris-based agency is only expecting global oil demand to grow by 0.9 million barrels per day (bpd) in 2014; that’s a decline of 65,000 bpd compared to its August forecast, and 300,000 lower than its July expectations.
While the trimmed forecast for oil in 2014 might raise some eyebrows, the IEA notes that “demand growth is still expected to gain momentum.” That said, “the expected pace of recovery is now looking somewhat more subdued.”
What do lower oil prices mean?
With oversupply taking center stage in the oil market, lower oil prices could be a reality that the market will have to face. As the Globe explains, “high prices offer enough incentive for producer to bring new supplies from expensive sources.”
Lower prices, on the other hand, offer up the opposite. High-cost production from shale formations and the oil sands won’t be as viable as the lower-cost conventional crude found in the Middle East. So while the market has reveled in high prices, North America is going to have to come to terms with the fact that high prices are not the ticket to economic oil extraction.
Securities Disclosure: I, Vivien Diniz, hold no direct investment interest in any company mentioned in this article.