The oil price dilemma: upwards or downwards?

The uncertainties related to oil prices persist and international market analysts fail to forecast a coherent path on the long term. So far the only aspect agreed upon by the major players across the world oil market is that demand will continue to rise this year.

The slowdown of China’s economy growth and the high oil production in the US generated a surplus on the global market. This surplus resulted in March in an average decrease by USD 1.6 per barrel of the oil price benchmark. OPEC contributed to this market surplus in full, extracting, in March, by 810,000 barrels per day more than the previous month, up to an average of 30.79 million barrels per day. The amount is well above the OPEC estimated demand for its production in 2015, which was of 29.3 million barrels per day.

Overall global oil production increased by 900,000 barrels per day in March, up to 94.52 million barrels per day, thus exceeding the expected average demand for this year anticipated to 92.45 million barrels per day. OPEC representatives say that under these circumstances it will be difficult to see the oil price climb in the coming period. At most, we could talk about a very moderate growth. However, reality shows that oil was being traded by the end of March at the highest level in the last five months (since December 2014), due to concerns about a possible escalation of the conflict in the Middle East, following the Saudi military campaign in Yemen. In April the oil price has appreciated by 18% as a result of these fears, despite the fact that the US oil reserves have reached the highest level in over 85 years. The exploration activity in the US instead has been reduced to the minimum of the last five years, the number of new active wells being of 703, the lowest number since October 2010, OPEC noted in its April report. According to these estimates, the total oil consumption will reach 92.5 million barrels per day in 2015 as against 91.3 million barrels per day in 2014, the OPEC forecast being unchanged from the one released in March.

In contrast, the International Energy Agency (IEA) is more optimistic in its April report, estimating a higher growth than expected of the global oil demand in 2015, supported by lower temperatures and by the improved prospects for the global economy. According to the IEA, the global oil consumption will increase by 1.1 million barrels per day against last year, expected to reach 93.6 million barrels per day. The estimate is by 90,000 barrels per day higher than the forecast released in March. The IEA believes that the rebalancing of the oil market could take longer than expected, even though demand has increased due to the higher OPEC oil output, as well as due to a possible increase in Iran’s oil exports.

In this game of forecasts Russia will obviously have a say, but one should expect June, when the Russians are to meet the OPEC representatives. According to Minister of Energy Alexander Novak, the Russian side wants to discuss the opportunity to cut the oil output as the prices are now almost half of those ten months ago. It will be a very important meeting, especially as it comes a few days before the OPEC meeting in Vienna, scheduled for June 5.

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