Jadwa Investment have released their quarterly update on the global oil market.
01/10/2014 12:16 AST
“Q3 2014 was marked by a sudden decline in oil prices, with the Brent benchmark dropping by 7.3 percent in Q3 2014, to an average of $102 per barrel, down from $110 in Q2 2014. We see this decline coming about from a combination of accelerating US supply, resulting in a glut of light sweet crude in the Atlantic Basin, weaker than expected global demand, stabilization in geopolitics, and an appreciation of the dollar.
“Although the growth of light, sweet US crude oil production has been accelerating in the last few years, global production outages in a number of countries have delayed the impact of US supply rises on oil prices. US production increased by 3 mbpd in the five years since Q3 2009, but outages in five countries (Libya, Iran, Yemen, (South) Sudan and Syria), totaling 2.4 million barrels per day (mbpd), meant oil supplies that were no longer going to the US found alternative markets quite easily. Since 2012, however, rising US oil production has been backing out imports of West African crude, mainly Nigerian crude. Nigerian exports, which are of the light sweet type too, totaled 1.1 mbpd to the US in 2007, but dropped to an average of 140 thousand barrels per day (tbpd) in H1 2014 and the US imported no crude oil from Nigeria between June 27 and August 8 2014. As a result, a large portion of this unwanted Nigerian crude has contributed to creating a glut of supply in the Atlantic Basin, putting downward pressure on Brent prices.
“The glut in West African crude has also come about at a time when concerns over geopolitics issues, which had previously maintained a floor on prices, receded. In Q3 2014, we saw no major additional damage to oil infrastructure in Iraq as violence did not spread to the oil exporting areas in the south. The Ukraine-Russian conflict saw sanctions applied by both sides but these sanctions did not impact upon short to medium oil supplies and, although conflict continued in Libya, oil output increased. As these key geopolitical events stabilized, the risk premium attached to oil prices decreased, pushing prices downwards.
“Lastly, an appreciation of the dollar in the last two months has seen it reach its highest point in over a year which, in turn, has also contributed to decreasing global demand for oil and added to downward pressure on prices. Oil prices and the US dollar exchange rate have a negative correlation, since the global market for crude oil is generally priced in the dollar. Therefore an appreciation of the dollar is usually accompanied by a decline in global oil prices, due to decreases in demand as it becomes more expensive for non-US consumers, and vice versa. The current dollar strength is a result of the expectations of rising interest rates in the US, as the Federal Reserve (Fed) ceases its asset-purchasing program plus looser monetary policy implemented by both the EU and Japanese central banks, to support their respective economies.
“According to OPEC data, global demand in Q3 2014 increased by 1.4 mbpd, year-on-year, with 1.5 mbpd of increases from non-OECD countries and a drop of 0.1 mbpd in OECD countries. Weak economic growth, especially in the EU and Japan, continues as a drag on oil consumption amongst OECD countries, but an uplift in economic activity in the US and a rise in demand during the winter months will result in higher consumption during the final quarter of 2014. According to OPEC data world oil demand is expected to grow by 1.3 percent in 2015, or 1.1 mbpd, supported by non-OCED rises, with OECD countries only seeing an increase in demand in the final quarter of 2014.
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