World Economies Still Suffering From The Biggest Oil Market Imbalance Ever

The report of International Energy Agency (IEA) shows that the demand for oil is slowing down faster than expected. Oil markets will have to wait a bit more to become balanced again, which means that the world economies will continue to suffer.

For 2016, the demand is estimated to be around 1.3 million barrels per day, but that number is significantly decreased. Only in September it is down by 100.000 barrel per day, the IEA report shows.

Third quarter production slowdown caused lower demand for oil and as it looks from this perspective, it will continue to go down next year.

While we were expecting a turnover on oil market, new analysis included the latest data and changed our optimism. The perspective on oil market now looks a bit scary. Constant oil price cuts from 2014 were unsuccessful attempts to restore the demand.

Oil Market Imbalance

Another Blow To The Market And The World Economy

Second blow was given by OPEC members who made this issue even bigger since they started with policy of defending its market share with other means, not only with price. Strategy was that Major Middle East producers and OPEC members put pressure on cartel members who have seen oil revenues to fall to more action.

As result of those actions, production of other non-OPEC suppliers continued to decline also. If we look at the numbers, we could see that global supply in August fell for 300.000 barrels per day.

Playing active and defensive game on the market, OPEC members raised their production. Now we are seeing the situation where OPEC members have production almost at the highest levels, but the supply is 300.000 barrels per day smaller. The imbalance continues, which is bad news for countries who don’t have a developed economy.

Current Situation

Currently, the prices are moving around 45-47$ per barrel and fluctuating on smallest sign of demand raising or production cuts. Last Tuesday, the prices fell in early trade caused by info that drilling in U.S. is increased, but by the afternoon the prices again returned on previous levels.

As IEA officials say: Oil markets are now in a waiting game, but future with stable demand and supply is not near and is not looking certain.

The biggest questions bothering all participants on oil market now are:

  • Will the demand start to surge soon?
  • When will oil market be returned to balance?
  • What will be the new balanced price per barrel?

Normal situation for this would be that demand is rising due to low prices, but totally opposite is happening. Supply is growing and demand is slowing, which is causing oil companies stocks and bonds to be on lowest levels than ever before and making them cheap and maybe a good opportunity for investing.

In Conclusion

Growth of demand which we saw at the beginning of the year is fading slowly and it will be hard for it to go over 1.3 million barrels per day. Crude oil demand is lowered by all participants on market and not showing signs of recovery. Small growth of 0.1 million barrels per day didn’t succeed in returning demand-supply in balance. For time being, we can only expect that supply will stay above demand and stock piles will grow, until…?

Graham Watts is the founder and “spiritus movens” of the Possiogreta, fast growing business and financial blog.