In 1999, as Saudi Arabia unleashed a bitter price war on other oil producers and drove crude oil prices down to $8 a barrel, The Economist summed up the carnage with a three-word title on its cover: Drowning in Oil.
Fast forward 18 years, and the script is almost the same. Saudi Arabia is giving high-cost producers ‘a good sweating’, prices have fallen to 13-year lows below $28 a barrel, and this time it’s the International Energy Agency that’s warning the world “could drown in oversupply.”
That was the message from the IEA Tuesday in its monthly review of the global oil market, where, it says, supply is set to outstrip demand for a third straight year in 2016. The lifting of sanctions on Iran will do more than offset the expected drop in supply from wells outside of the Organization of Petroleum Exporting Countries, it said, while a slowing world economy will mean that demand doesn’t rise as fast to correct the imbalance.
El Niño has further complicated things, neutralizing the normal seasonal rise in demand by keeping temperatures way above average in the northern hemisphere in December. What with emerging market economies also slowing down, global demand for oil was only 1 million barrels a day above year-earlier levels in January. Only four months earlier, demand had been running over 2.1 million b/d above year-earlier levels. The IEA now assumes that demand will grow by an average of only 1.2 million b/d this year.
But the real shock is coming from the supply side. Iran’s deputy oil minister Rokneddin Javadi was quoted by Reuters Monday as saying the order had been given to increase output by 500,000 immediately. The IEA, by contrast, reckons that at most 300,000 b/d of extra Iranian oil will be hitting world markets by the end of March.
The IEA indirectly corroborated a claim made by OPEC in its monthly report on Monday that it had gained the upper hand over the U.S. shale industry with its price war. OPEC expects non-OPEC supply to fall by 0.66 million b/d this year as shale drillers run out of cash and their stockholders and creditors run out of patience.
Crude oil futures have recovered some poise in the last 24 hours after fourth-quarter gross domestic product data from China avoided giving any new reason to panic (even if most international observers think its actual growth rate is well below the one officially reported). By 1130 ET, the U.S. benchmark future traded at $30.27/bbl, while the global benchmark Brent was at $29.43/bbl.
The actual demand picture from China has been more robust than recent headlines would suggest. In December, the country imports surpassed 7 million b/d for the first time to stand at an average 7.15 million b/d, as traders took advantage of low prices to fill strategic reserves. What isn’t clear is how much of that oil was actually consumed. The IEA expects global oil stocks, which are already at record highs, to rise by another 285 million barrels this year.
“There will be enormous strain on the ability of the oil system to absorb it efficiently,” the IEA said.
Back in 1998, The Economist’s cover, wittingly or otherwise, came just as the market was turning, starting the rally that would lead to prices of nearly $150/bbl within a decade. There was no suggestion from either OPEC or the IEA that any such turn in prices is in sight yet, though.