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Oil Price Rebound Looking Unlikely

Oil Price Rebound Looking Unlikely

Oil prices may have firmed up a bit this spring, but we could be heading into another protracted period of weak prices.

First there are the demand risks. The Chinese stock market turmoil raises serious concerns over a potential financial crisis, which, needless to say, would be negative for oil prices.

The Greek crisis, again, presents risks to oil markets, not because Greece is a major oil produce or consumer (it is neither), but because of the threat of instability to the euro and to financial markets.

Both of these factors were behind the dramatic fall in oil prices earlier this month, but both are largely baked into the price already. And with an apparent band aid to the Greek crisis (but not a real solution) in hand, and the steadying of the Chinese stock markets over the last few days on the back of heavy intervention by the Chinese government, these two forces could be temporary.

Related: Oil Price Plunge Raises Fears for Indebted Shale Companies

However, there are other dangers ahead for oil prices. The International Energy Agency (IEA) estimated in its monthly oil market report that global demand growth will slow to just 1.2 million barrels per day (mb/d) in 2016, down from 1.4 mb/d this year. Weak demand means consumers won’t be able to soak up the extra supply.

But then there are the supply risks. OPEC revealed in its own monthly report that Saudi Arabia is now producing at its highest level on record. From May to June, Saudi Arabia ramped up output by an additional 230,000 barrels per day to reach a record high of 10.5 mb/d. Iraq also added 303,000 barrels per day in June and Nigeria added 75,000 barrels per day. OPEC continues to flood the market and collectively the cartel is producing well in excess of its 30 million-barrel-per-day target.

 

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