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 While output continues to grow, the economic outlook has darkened in
top energy consumer China, where oil demand has been one of the few
bright spots in the market.
Add to the mix record output by the Organization of the Petroleum
Exporting Countries (OPEC) and the possibility of a return of
Iranian crude exports, and further price turbulence looks almost
certain.
Oil prices began a seven-month rout this time last year that took
Brent crude futures <LCOc1> from $116 per barrel to around $45 by
January.
While prices have crawled up since, there are few signs yet that
OPEC's strategy of keeping output high in a bid to drive out
competitors, such as U.S. shale oil, is doing enough yet to change
market fundamentals.
"The real bearish change is OPEC production that has risen from
29.79 million barrels per day (bpd) last year to over 31 million
bpd. I think this is the most significant fundamental change of the
last 12 months," said PVM oil analyst Tamas Varga.
U.S. Energy Information Administration (EIA) data published this
month shows that global petroleum oversupply, or production versus
consumption, has more than doubled to 2.6 million bpd since the end
of the second quarter last year.
"We're not in the clear as far as the supply-demand balance. In some
ways, we think this whole situation is getting worse," said Vikas
Dwivedi, global head of oil and gas strategy at Macquarie.
And more oil may yet come to the market.
Major powers and Iran are trying to agree on a nuclear compromise by
the end of the month that could allow a lifting of sanctions that
have reduced Iran's crude exports to under 1 million bpd, down from
3 million bpd in 2011.
Should Iranian oil return before the end of the year, traders said
that would prevent a seasonal drawdown in stocks that usually
happens in the fourth quarter, preventing a re-balancing of the
market.
DON'T BET ON CHINA
How the market develops towards the end of the year and into 2016
will also depend heavily on China.
Its oil imports have held near record highs for over six months as
its gasoline demand soared on a surge of new cars and as the
government built up its strategic oil reserves.
And while some analysts believe China's demand will remain strong,
there are signs that its thirst for oil is slowing as the world's
second-biggest economy grows at the slowest pace in decades.
"Don't bet on a rebound in China later this year. The government has
tried a lot to spur growth but so far it's not working, and that
could also retrain energy demand," said Frederic Neumann, co-head of
Asian economic research at HSBC.
China's oil imports fell more than 10 percent in May from a year
ago, marking the steepest drop since November 2013, while car sales
also dipped.
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The global economic outlook has also dimmed, with the World Bank
cutting its 2015 outlook from 3 percent to 2.8 percent, urging
countries to "fasten their seat belts".
Fuelled by lower prices, many analysts expected production,
especially of price sensitive U.S. shale drillers, to fall.
Yet even after producers curbed drilling and shut some production,
output has remained high as previously drilled sites started
operations and producers slashed costs to stay in business.
At the same time, OPEC is producing near record levels and top
exporter Saudi Arabia has even hinted it could increase output
further.
The group decided this month to keep its taps open in an attempt to
retain market share. With production set to stay high, changes in
demand have taken on greater importance.
PERMANENT GLUT?
The EIA expects oversupply to last at least until 2017, but others
say that the glut could be more permanent as oil loses its share in
the world's energy consumption.
"I think the overwhelming trend is that oil intensity of developed
and developing economies is decreasing rapidly," said Tom O'Sullivan
of energy consultancy Mathyos Japan, highlighting a halving of
China's energy intensity - the amount of energy used to generate a
unit of GDP - over the past 30 years close to levels seen in fully
developed economies.
BP <BP.L> said in its annual outlook this month that last year may
be seen as a turning point for the energy industry.
"In years to come, it is possible that 2014 may come to be seen as
something of a watershed for the energy industry.... The big picture
remains one of abundant reserves, with new sources of energy being
discovered more quickly than they are consumed."
(Reporting by Jacob Gronholt-Pedersen and Henning Gloystein in
SINGAPORE, Christopher Johnson in LONDON, Jessica Resnick-Ault in
NEW YORK, and Osamu Tsukimori and Aaron Sheldrick in TOKYO; Editing
by Ed Davies)
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