OPEC Says Cheap Oil To Hit Rival Supply Harder In 2016

Crude oil prices extended their slide on Thursday to near seven-year lows as traders looked beyond a drop in US crude stockpiles to focus on a global supply glut, while a stronger dollar weighed on commodities.

The Organization of the Petroleum Exporting Countries reported its collective production rose by 230,100 barrels a day in November to 31.7 million, the highest in three and a half years and beyond its 30 million ceiling target.

The prices of crude oil stayed at levels which are not seen since early 2009, as the output in the Middle East continued to increase, despite of huge oversupply.

On the Intercontinental Exchange (ICE), Brent crude for January delivery wavered between $39.51 and $40.69 a barrel, before closing at $39.75, down 0.34 or 0.88% on the day. Demand growth peaked at 2.2 million barrels a day in the third quarter, but there are preliminary signs that it has eased to 1.3 million barrels a day.

Nevertheless, he said, certain sectors of the economy, were benefitting from the current situation, especially those heavily dependent on oil and gas such as aviation, transportation and manufacturing.

For 2016, global oil demand growth is expected to increase by around 1.25 mb/d, unchanged from the previous report, averaging 94.13 mb/d.

Still, the IEA said the pace of stock-building should roughly halve next year and that it was very unlikely that global storage capacity would be filled. This creates a huge problem for most US oil producers who will now lose money on every barrel of oil they produce.

“Prices have tumbled yet again as many investors try and position themselves ahead of the weekend, and also next week?s key Fed decision”.

Sustained falls in output could help to stabilise the price of oil, although some market forecasters suggest the price could continue to fall to as low as $20 a barrel.

The International Energy Agency said in its monthly report that world oil demand growth will slow to 1.2 million barrels a day in 2016 after surging to 1.8 million barrels a day this year, as support from sharply falling oil prices begins to fade. “After the OPEC meeting we’re poised to test the lows last reached during the financial crisis”. Because the US Dollar is inversely correlated to the price of US Oil, a resumption of US Dollar strength would presumably send US Oil (and other dollar-denominated assets) a good deal lower toward 2009/2008 lows.

Non-OPEC supply growth shrank to below 0.3 million bpd in November from 2.2 million bpd at the start of the year.

Of course, oil companies will be just fine if prices push through the $55 a barrel level – and stay above this level long-term.

“As extra Iranian oil hits the market, inventories are expected to swell by 300 million barrels”, it said.