10 / 84
ECONOMIC REPORT
2016
10
3. Prices and Markets
3.1 Oil Prices and Market Trends
Oil Prices Reflect Persistent Market Imbalance
The collapse in oil prices in late 2014, triggered by the US shale revolution,
the acceleration of non-OPEC supply and OPEC’s determination not to cede
market share, set in motion a gradual adjustment process in both supply
and demand that gathered pace through 2015 and continued in the first half
of 2016. World oil demand grew more strongly in 2015 (+1.8 million barrels
per day (mb/d)). While demand is expected to continue to grow, the rate of
growth is expected to slow. On the supply side, non-OPEC supply, which rose
by about 1.5 mb/d in both 2014 and 2015, will record a sharp decline this
year in response to the fall in discretionary upstream expenditure and the
contraction of US tight oil production. In the second half of 2016, the flows of
oil on the supply and demand sides of the market are expected to be back in
balance but there remains a large overhang of excess stocks built up in 2014
and 2015 that promises to persist well into 2017. Only when both the flows
and stocks of crude and products are back in balance can the market find a
new sustainable range for crude oil prices.
Crude oil prices dropped briefly to a 12-year low of $28 per barrel (bbl) in
January 2016, confounding earlier expectations that the recovery in the
first half of 2015 would lead to a new trading range of $40-70/bbl in 2016.
Prices recovered to $50/bbl in June 2016 and have since traded in a range of
$40-50/bbl under the weight of the commercial stock overhang.
Brent has averaged $41/bbl over the first eight months of 2016, reflecting in part the trade-weighted strength of
the US dollar, and is likely to record the lowest nominal level since 2004 for the year as a whole.
The structure of crude prices remains in contango
8
with prices for delivery in 2020 ($55/bbl) well above spot
prices, encouraging the continued holding of crude stocks and postponing any sustainable recovery in spot prices.
The fall in five-year forward crude prices from $80-85/bbl in 2013-14 to $55/bbl today provides a measure of the
market impact of the emergence of low-cost US tight oil production as a new price-responsive source of non-OPEC
supply and the relaxation of US crude export controls.
8
Contango refers to the structure of prices where the price for prompt delivery is below the price for forward delivery.
Only when both
the flows and
stocks of crude
and products are
back in balance
can the market
find a new
sustainable
range for crude
oil prices.