Energy Monitor October – Oil prices at four-year low

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  • Oil prices declined and reached the lowest level since 2010
  • Oversupply, disappointing demand and a stronger US-dollar are the main reasons for this
  • The oil price development will be dominated by the upcoming OPEC meeting

Oil prices decline fast

The (Brent) oil price dropped below USD 88/bbl, the lowest level since December 2010. Earlier this year, the market was mainly dominated by fear for possible oil shortages (as a result of higher demand triggered by economic recovery), and possible production disruptions (due to the emergence of IS and the sanctions against Russia). There are several reasons why, after reaching the 2014 peak in June (USD 115,71/bbl), oil prices rapidly declined. Especially disappointing economic data from Europa and China, as well as ongoing strong oil production by both OPEC and Non-OPEC countries, lead to this pressure on oil prices.

Oversupply remains and stronger US-dollar weighs

The International Energy Agency (IEA) indicated in its monthly Oil Market Report that its expectation for oil demand in 2014 and 2015 was adjusted lower. Furthermore, the IEA signalled a rise of both OPEC and Non-OPEC oil production in September. Especially the unexpected rise (+25%) of Libyan oil production contributed to the oversupply in September. As a result, market expectations for a longer period of oil oversupply increased. This oversupply (except for only three quarters) already has existed since 2012 (Figure 2). Furthermore, the US dollar strongly appreciated as a result of differences in monetary policy between Europe and the US. This also led to extra pressure on oil prices.

Volatility will remain while markets focus on OPEC

The crucial question is what the direction for oil prices will be in the coming weeks. Our view is that oil prices will remain volatile, especially until the upcoming OPEC meeting on 27 November. This meeting will be very important to watch as it will set the tone for the oil supply in 2015. Non-OPEC oil production (like in the US and Canada) is expected to rise. As a consequence, to meet the moderate rise in oil demand, as a result of global economic growth, stable OPEC oil production should be enough. This will add pressure to the OPEC market share. After all, the fixed quota (currently set at 30 mb/d) will have to be set again, and an even bigger oversupply will weigh even more on oil prices. But the pressure on the separate OPEC members also increases. Iraq still has the ambitions to significantly increase its oil production. Furthermore, Libyan oil production is recovering but currently on half capacity yet. Iran will try to increase its oil exports as soon as a nuclear deal is signed with the Western countries. Finally, Saudi Arabia will try to maintain its markets share to make sure that is can meet its fiscal budget targets, even with lower oil prices.

Over all, for the coming weeks, some more pressure on oil prices cannot be excluded. However, a healthy price correction higher may seem somewhat more likely after such a strong drop in prices.