World oil prices slumped by about three per cent yesterday, in response to reports by the International Energy Agency (IEA), which forecast that the oil glut will protract till mid-2017, at least six months longer than it had earlier projected.
While U.S. West Texas Intermediate crude fell $1.39 or 3 per cent to settle at $44.90, Brent crude shed $1.22, settling at $47.10 a barrel.
The Paris-based organisation had earlier seen the oil oversupply disappearing in the latter part of 2016, but in its latest report released on Tuesday, it said demand growth was slowing while supply was rising, meaning that the glut was now due to linger “at least through the first half of next year.”
This is coming as crude oil production in Nigeria dropped the most in August among its peers in the Organisation of Petroleum Exporting Countries (OPEC), paring the gain it recorded in the previous month.
“Oil remains under pressure again today after the IEA reported that oil demand growth will be lower than expected this year,” said Craig Erlam, senior market analyst at Oanda trading group.
In the late European afternoon, US benchmark West Texas Intermediate for delivery in October was down $1.30 at $44.99 a barrel.
Brent North Sea crude for November delivery shed $1.08 to $47.24 a barrel compared with the close on Monday.
The timing of the world oil market’s return to balance is “the big question”, the IEA said in its monthly report, adding that current prices — above $45 — would suggest supply falling and strong demand growth.
“However, the opposite now seems to be happening,” it said. “Demand growth is slowing and supply is rising.”
The trend may fuel speculation of a possible production freeze — aimed at supporting prices — being agreed between OPEC and non-OPEC member, Russia, at a meeting in Algeria later this month.
China and India, which had been key drivers recently of demand growth, are “wobbling”, it said, while a slowdown in the United States and economic concerns in developing countries have also contributed to the surprise development.
Global oil demand is now expected to grow by 1.3 million barrels per day (mb/d) in 2016, to 96.1 mb/d, from its original forecast of 1.4 mb/d growth.
The IEA also trimmed its demand growth forecast for 2017 by 200,000 barrels per day, to 97.3 mb/d.
On the supply side, output fell in August, led by producers outside of the OPEC cartel.
After gains in June and July, global oil supplies dropped by 300,000 barrels per day last month, to 96.9 mb/d.
Non-OPEC supply is expected to rebound next year, after declining this year.
But, the IEA said OPEC production edged up last month to a near-record supply level, which “just about offset steep non-OPEC declines.”
Producers, Saudi Arabia, Kuwait, the United Arab Emirates and Iraq are all at, or near all-time highs, the report said.
“Saudi Arabia’s vigorous production has allowed it to overtake the US and become the world’s largest oil producer,” it added. The US had held the spot since April 2014.
In late 2014, OPEC shifted its strategy to defend market share, rather than price, a move which has hit high-cost non-OPEC producers especially hard. Among them, the United States, formerly the engine of non-OPEC supply growth, has particularly suffered.
Iran, meanwhile, has been “swift” to ramp up its production after the lifting in January of years of nuclear-linked sanctions.
Production by the 14 members of OPEC rose slightly in August to 33.47 mb/d.
The IEA, which advises oil consuming nations on energy issues, said its latest data indicated that the “supply-demand dynamic may not change significantly in the coming months.”
“As a result, supply will continue to outpace demand at least through the first half of next year,” it said.
“As for the market’s return to balance – it looks like we may have to wait a while longer,” it added.
As a result of the stubborn supply glut, producers have been hurt by a plunge in crude prices from around $100 in mid-2014 to 13-year lows of below $30 at the start of this year.
Analyst Olivier Jakob, of Switzerland-based Petromatrix, said OPEC was “trapped” as non-OPEC supply had been able to adapt to lower prices better than expected.
“The IEA data is also suggesting that an OPEC ‘freeze’ will not be enough to rebalance the market in 2017,” he said in a note to investors.
Nigeria records biggest drop in oil output
Nigeria had in March lost the status of Africa’s top oil producer to Angola when the country’s production dropped to 1.677 million barrels per day, compared to Angola’s 1.782 million bpd.
OPEC’s Monthly Oil Market Report for September, showed that Nigeria’s oil output fell to 1.468 million bpd in August from 1.52 million bpd in the previous month, based on direct communication.
Nigeria had in July recorded the biggest increase in output, but it was not enough to help the country regain the top spot from Angola.
According to secondary sources, OPEC crude oil production stood at 33.24 million bpd in August, a decrease of 23,000 bpd over the previous month.
“Crude oil output increased mainly from Saudi Arabia and Iran, while Nigeria and Libya showed the largest drop,” the 14-member oil cartel said in the report.
Angola saw its oil output rise to 1.775 million bpd in August from 1.767 million bpd the previous month, based on direct communication, according to the OPEC report.
Libya’s production dropped to 292,000 bpd from 313,000 bpd, while Venezuela produced 2.104 million bpd, down from 2.117 million bpd.
Ecuador’s output fell to 542,000 bpd from 549,000 bpd, while Iraq saw its production dropped by 2,000 barrels to 4.354 million bpd.
Saudi Arabia, the biggest producer in the group, recorded the biggest increase in August as it produced 10.605 million bpd, up from 10.577 million bpd in the previous month.
Iran, which has continued to increase output in a bid to snap up more market share after sanctions were lifted, produced 3.653 million bpd, up from 3.631 million bpd.
According to the report, Africa’s oil supply is projected to average 2.12 million bpd in 2016. This represents a decline of 20,000 bpd year-on-year and reflects an upward revision of 10,000 bpd from the August report.
This year, oil production from Congo is only expected to grow by 50,000 bpd to average 320,000 bpd, while output in other African countries, despite increasing output from Ghana’s production start-up in the Tweneboa, Enyenra, Ntomme project and a production ramp-up in Jubilee field in the second half of the year, will decline or be stagnant, OPEC said.
It raised its forecast of oil supplies from non-member countries in 2017 as new fields come online and United States’ shale drillers prove more resilient than expected to cheap crude, pointing to a larger surplus in the market next year.
Demand for crude from OPEC will average 32.48 million bpd in 2017, down by 530,000 bpd from the previous forecast, according to the report.
Oil is trading at $47 a barrel, half its level of mid-2014, as a supply glut that OPEC hoped cheap oil would banish sticks around.
“It is expected that there will be higher non-OPEC production in the second half of 2016 compared to the first half,” OPEC said in the report.
The cartel expects non-OPEC supply to rise by 200,000 bpd in 2017, as against a previous forecast of 150,000-bpd decline.
Near-record OPEC output, and higher supply from outside, could make it harder for OPEC and Russia to come up with steps to support the market. Producers are expected to meet in Algeria on the sidelines of the International Energy Forum from September 26 to 28.
An attempt by producers to agree to a production freeze in April failed as Iran, wanting to boost oil exports that had been restrained by Western sanctions, refused to join and Saudi Arabia insisted all producers took part.