Having reached 2014 highs in June, crude oil prices started to free fall and in the search for reasons some people have pointed towards the International Energy Agency’s (IEA) changing demand and supply expectations.
Since June, when its 2014 global oil demand growth forecast hit a peak of 1.4million barrels per day (bpd), IEA’s projections have fallen by half.
By contrast, supply expectations have been much more stable – since June, the IEA’s forecasts of non-Opec (Organisation of the Petroleum Exporting Countries) oil supply growth have expanded by a modest 300,000bpd and the IEA’s non-Opec supply forecast is currently only 100,000bpd above the level at which it started 2014.
According to the IEA, it is the demand side of the equation that is primarily responsible for the 40% decline in crude oil prices since the summer.
Other commentators emphasise that production among Opec’s most at-risk countries – Iraq, Iran, Libya and Nigeria – has made strong gains in recent months. This was despite rising violence in both Iraq and Libya.
The Opec cartel’s decision not to act at its hotly anticipated regular meeting on November 27 saw oil prices plunge further.
Plenty of the ensuing commentary has focused on the idea that Opec has somehow lost or is fast losing its relevance to an oil market increasingly in thrall to burgeoning US onshore production potential.
We suspect it may be too early to write off Opec – the key actor in world crude oil markets for over four decades now.
The cartel comprises 12 of the world’s biggest oil-producing nations, including all of the major Middle Eastern states, Venezuela and Nigeria.
According to Opec, the cartel controls 81% of the world’s known oil reserves and accounts for about a third of the world’s oil sales. Major oil producers not in Opec include Russia, Canada and the US.
By restricting the output of its members, the cartel has, at times, been effective in significantly increasing the price of oil. This happened from the 1970s into the 1980s, and the price explosion over the past decade is evidence that the cartel has been back in business until recently.
Saudi Arabia has always been seen as the lynchpin of Opec, with the largest share of output. It is the only Opec producer with significant spare capacity.
The Saudis have been widely thought to require Brent crude prices of at least $90-$100 to balance their budget. When this supposed floor was breached in October, with still no hint of Saudi supply response, the world of many oil price forecasters was turned upside down as further, more dramatic price declines attest.
Mark Flynn is a director at Barclays Wealth and Investment in Aberdeen
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