There is little chance of a respite for oil in the next few months as global demand growth will "ease back considerably" in 2016, according to the latest forecasts from the International Energy Agency (IEA).
Crude oil prices have spiralled lower in January with what the IEA called "brimming stockpiles" pushing global benchmarks below US$30 (S$41.90) a barrel. On Tuesday, Brent crude for April delivery was trading at US$32.80 a barrel and US crude was at US$29.93, showing little let-up for prices.
The IEA cast doubt over a recovery for oil markets in its latest monthly report on Tuesday, saying that global oil demand growth, which peaked at a five-year high of 1.6 million barrels a day in 2015, was forecast to "ease back considerably" in 2016 to 1.2 mb/d.
Worryingly for market watchers fearing a global slowdown, oil demand growth was to be "pulled down by notable slowdowns in Europe, China and the US Early elements of the projected slowdown surfaced in the fourth quarter of 2015," the IEA said.
OPEC, the 12-member group led by Saudi Arabia, has been seen as the reason for the decline in oil prices since it decided in November 2014 not to cut production as part of a strategy to retain market share and pressure rival producers.
Nevertheless, OPEC has forecast that global demand for oil would rise in 2016 and that this would be accompanied by a decline in supply from some producers (such as its non -OPEC rivals) and that this would help to rebalance supply and demand in the market and, subsequently, support prices.
OPEC mops up
On the supply side, the IEA has forecast a decline in non-OPEC producers. These producers, such as those in the US, have higher production costs and have tended to respond to the lower oil price by cutting production, closing rigs and cancelling exploration projects. Oil majors have seen profits plunge on the back of lower oil prices too.
The IEA said that global oil supply dropped by 200,000 barrels a day to 96.5 mb/d in January "as higher OPEC output only partly offset lower non-OPEC production." Showing the decline is not set to reverse any time soon, non-OPEC supplies are projected to decline by 600,000 barrels a day to 57.1 mb/d in 2016.
On the contrary, OPEC crude oil output rose by 280,000 barrels a day in January to 32.63 million barrels a day as output from Iran. Freed from international sanctions that restricted its oil production, Iran came back online and Saudi Arabia and Iraq "all turned up the taps," the IEA said. In fact, oil supplies from the group during January were nearly 1.7 mb/d higher year-on year.
With oil prices continuing to defy gravity, speculation has mounted over how low oil can actually go. The IEA said that while some commentators were too bearish, optimists had to look at the cold hard facts affecting prices.
"Perhaps some of the more fevered forecasts of oil prices falling to as low as $10 a barrel are extreme and better days do lie ahead for oil prices. However, before victory over the bearish forces is declared we should look at the main factors driving this optimism."
There had been hopes that OPEC and non-OPEC producers could come to a deal to cut output but the IEA noted that this was just pure "speculation" at this moment. "It is OPEC's business whether or not it makes output cuts either alone or in concert with other producers but the likelihood of coordinated cuts is very low. This removes one driver of bullishness."
Another widely held view is that OPEC production, other than Iran, will not grow as strongly in 2016 as it did in 2015 but the IEA said that "although it is still early in the year, Iraqi output in January reached a new record and it is possible that more increases could follow."
"Iran has ramped up production in preparation for its emergence from nuclear sanctions and preliminary data suggests that Saudi Arabia's shipments have increased. Thus, another driver might be removed."
Lastly, it said that hopes that demand growth would receive a boost from the collapse in oil prices were also misplaced, particularly given concerns over a slowdown in emerging economies in Brazil, Russia and China.
"If these numbers prove to be accurate, and with the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term. In these conditions the short term risk to the downside has increased," the IEA said.