Oil prices jumped significantly during the month of August following uncertainty in the Middle East. However, the fundamentals of the oil marker point towards a declining trend in the oil market throughout the remaining months of 2013 and through 2014.
The Energy Information Administration (EIA) released its short-term outlook for the month of September 2013 and has indicated that the recent hike in crude oil prices was only temporary. Supply disruptions from Libya and conflicts in Syria were considered the main factors driving the price of oil upwards.
Figure 1: Global crude oil supply versus major international price standards
Shifting oil prices
A small jump was seen in international prices during the past month but matters seem to have settled down as talks of war subsided. The major factor driving the prices to a stable level will be the increased supply from non-OPEC nations.
It is anticipated that OPEC supply will actually reduce from 35.7 million barrels per day (bblpd) in August 2013 to 35.3 bblpd by December 2014. On the other hand, non-OPEC supply will increase by 1.52 bblpd over the course of the next sixteen months. 1.24 bblpd of this total increase will come from expansions in the U.S. The shale boom is expected to change the exploration industry in the U.S. and will play a bigger role in depressing international prices. Canada will also experience an increase in supply of 0.33 million bblpd. Global supply will increase to reach 91.7 million bblpd by December 2014.
Figure 2: Supply of crude oil
Increase in oil consumption
On the consumption side, the increase in consumption is expected to come from developing nations including China, Philippines, Singapore and other Asian nations. It is by December 2014 that the EIA expects oil demand to pick up again whereas during the year, large gaps between demand and supply are to be seen, which continue to keep prices down. Oil demand during 2014 is expected to average 91.25 million bbpd while oil supply will average 91.37 million bblpd. The persistent gap between demand and supply will ensure that prices are below their historical levels.
Figure 3: Demand/supply gap in the crude oil market
OPEC supply to shrink
OPEC also released their monthly report this week and reported that OPEC supply is expected to shrink and play a lesser role in total global supply. EIA reported the same in its report and said that OPEC spare capacity is expected to grow to over 4.6 million bblpd by end of 2014. While capacities across OPEC nations continue to grow, the production will be insufficient to utilize that. “These declines reflect unplanned outages of crude oil production among some OPEC producers as well as decreases in Saudi Arabia’s production in response to the increase in non-OPEC supply,” reports EIA.
Figure 4: OPEC production, capacity and excess capacity
A combination of expectation of increasing supply and stable demand across the globe has meant that WTI is forecast to average USD 102 per bbl over the remaining four months of 2013 and USD 96 in 2014. Brent is expected to average USD 102 in 2014.