According to the International Energy Agency, global oil demand growth is slowing at a faster pace than initially predicted. That could put a damper on the benefits of falling production.
The report reduced its oil demand forecast for every quarter until 2018. "For 2016, a gain of 1.3 million barrels a day is expected," the IEA said, a downgrade of 100,000 barrels a day from its previous forecast. "Momentum eases further to 1.2 mb/d in 2017 as underlying macroeconomic conditions remain uncertain."
Supply is falling thanks to negative North American supply growth, but OPEC, led by Saudi Arabia, is still pumping at full force. "At 96.9 mb/d, global oil output was 300,000 b/d below a year ago, but near-record OPEC supply just about offset steep non-OPEC declines," the IEA commented.
So while the latest price bump towards $50 a barrel was fueled by falling supply, surging OPEC output and unexpected weak demand could create yet another supply glut. Even North America has an opportunity to regain its supply losses if prices stay at $50 a barrel. The U.S. rig count has stabilized and is looking to grow. Meanwhile, investors could be severley overestimating U.S. shale oil's cost of production.
For now, the IEA says that it's a waiting game.
"When will the world oil market return to balance? That is the big question today. With the price of oil at current levels, one would expect supply to contract and demand to grow strongly. However, the opposite now seems to be happening. Demand growth is slowing and supply is rising. Consequently, stocks of oil in OECD countries are swelling to levels never seen before," the IEA said. "As a result, supply will continue to outpace demand at least through the first half of next year. Global inventories will continue to grow: OECD stockpiles in July smashed through the 3.1 billion barrel wall. As for the market's return to balance - it looks like we may have to wait a while longer."
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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