Oil price extends drop as IEA predicts weaker demand in 2016

OPEC’s report says “the oil demand forecast for 2016 is subject to considerable uncertainties, depending on the pace of economic growth, development of oil prices, and weather conditions, as well as the impact of substitution and energy policy changes”. Lower prices are clearly taking a toll on non-OPEC supply, with annual growth shrinking below 0.3 mb/d in November from 2.2 mb/d at the start of the year.

Extra production from Iraq contributed to this high output where industry sources estimate the country is now producing around 4.3 mln barrels a day.

The IEA said in a monthly report that growth in demand for oil will ease next year to 1.2 million barrels per day, from 1.8 million barrels a day this year.

The IEA, which advises developed nations on energy, warned that demand growth was starting to slow.

That has sent shockwaves across world equity markets because low oil prices slash profits for energy majors like BP, Total (Swiss: FP.SW – news) and Royal Dutch Shell (Xetra: R6C1.DE – news). He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto. Production from outside OPEC will contract by 600,000 barrels a day next year, compared with a surge of 2.4 million a day in 2014.

Still, the unrelenting low oil prices have prompted some US shale producers to turn off their taps, though not enough to rebalance the market, analysts said.

The prospect of higher rates boosts the greenback, which in turn makes dollar-priced crude more expensive for buyers using weaker currencies.

Banks such as Goldman Sachs have said oil prices could fall to as low as $20 per barrel as the world might run out of capacity to store unwanted oil.

West Texas Crude also hit a seven year low, trading at $36.55 U.S.

“This combination of stronger OPEC and non-OPEC supply translates into a larger current surplus, even as the overall forecast for 2016 was maintained at a similar level to a month ago”, said Tim Evans of Citi Futures. “So we believe the pick-up in price will come in late 2016”.

“The oil sector is expected to stay under pressure in the near term… as output from global oil producers is likely to rise further in the future”, Aw added.