Oil prices weaken amidst an abundance of supply

By Eithne Treanor

The weaker dollar may have helped to boost the oil price early in the week, but the market is awash with oil and there’s no sign of any slowdown in production. Geopolitical issues are also a concern but in early trading on Friday, Brent crude was priced below US$57 a barrel with WTI also losing ground around US$47 a barrel.

The International Energy Agency said there was a danger that a global oil glut was building and with American oil production showing no signs of decreasing, a price recovery will be difficult to maintain. The monthly report from the IEA said, “quite to the contrary, it continues to defy expectations.”

Even though maintenance season is underway, the IEA sees an alarming continued stock build. “Stocks may soon test storage capacity limits. That would inevitably lead to renewed price weakness.” Global supply is estimated at 94 million barrels a day for February, up 1.3 million barrels a day year-on-year.

The IEA estimates that global oil demand this year will be 93.50 million barrels. The report also said that American crude stocks were currently at a record 468 million barrels, above the figures from the US energy department.

There’s no sign of any cut back in oil production despite a clear oversupply on the market. The US department of energy said that crude inventories increased for the ninth straight week. Last week’s increase of 4.5 million barrels put stocks at almost 449 million barrels, the highest level for this time of year in more than 80 years.

Production is currently around 9.4 million barrels a day, the highest level in 42 years of US oil production, according to Commerzbank. Refinery maintenance season is around the corner, a situation that will continue to add to available stockpiles.
Oil storage facilities in major OECD markets are likely to be pushed to almost-full levels by the end of April and stretch even higher in May, according to the PIRA Energy Group.

Investment bank Goldman Sachs said there’s a real chance the American benchmark oil price could fall as low as US$40 again with so much oil on the market. The bank is concerned about the abundant global supply and the weak global demand that could put prices back at levels last seen in 2008 and 2009 in the midst of the global financial crisis.

Goldman Sachs is still optimistic about a recovery in oil demand in the second half of 2015, but their short term forecast is not so stellar.

Industry players met in Bahrain this week at MEOS, the bi-annual middle east oil and gas show where the OPEC secretary general, Abdulla El Badri said it was not OPEC’s duty “to subsidize” the more expensive oil producers by cutting production. He reminded the audience that OPEC and non-OPEC producers should work closer together to help stabilise markets where he suggested that the oversupply could amount to two million barrels a day in the current environment.

OPEC has held production in the range of 30 million barrels a day but non-OPEC supply has grown by almost 6 million barrels a day since 2008. He added that it would be mid year until the “true picture” emerged and said he hoped demand would increase in the second half.

While Iraq attempts to keep oil production steady, geopolitical issues dominate the country and the region. Iraqi forces fought Islamic State militants this week as they fought for the city of Tikrit in northern Iraq. The coordinated efforts of the government led Sunni forces and the Iranian backed Shiite militias are being tested by the might of the common enemy that is the Islamic State.

Iraq’s oil minister, Adil Abd Al-Mahdi said he expects oil exports to increase to 3 million barrels a day by the end of this month. A government spokesperson said the country is facing a crucial time battling ISIS and a low oil price. Revenues have fallen by about 40 percent this year, leaving a deficit of more than US$20 billion at a time when the country is desperately in need of funding to help rebuild its economy.

With lower oil prices, the country is also building up debts to the international oil companies who are currently under service contracts based on a fixed dollar fee.

A settlement is expected soon for American refinery workers, hopefully bringing to an end the biggest US refinery strike seen in 35 years. A tentative deal has been reached between the United Steelworkers Union and Royal Dutch Shell on measures surround salaries, health benefits, training and safety issues around the country. This is the sixth week of the strike involving more than 6,500 workers.

It was back in 1980 when American refineries last saw such a strike for a period of three months. With refiners back at work in 15 plants, this could help reduce crude stockpiles. Its estimated that 20 percent of American fuel production has been impacted in recent weeks.

While global oil demand is somewhat subdued in the second quarter, the IEA is more optimistic about the second half of the year as it raised its demand forecast. The agency said that should put the call on OPEC crude above 30 million barrels a day, matching their current target.