Tuesday, 9 September 2014
Oil price is weak on fundamentals
Firstly, US production has increased hugely and is expected to further. Imports are down to 9 million barrels a day and production is forecast to grow. Plus growth of shale gas is helping to reduce the need for oil imports. In addition, Europe's slowing economy and changing supply mix is reducing demand. This does not quite offset growth in demand from developing Countries, but demand growth is 0.2 million barrels a day average over the year, which is basically 0.3% annual growth at the moment.
This is whilst Libyan and Iranian supplies are offline, amazingly Iraqi production averages are the same since ISIS invaded, Russia too has maintained output.
Whilst this macro level picture is of a world not flooded with oil, but stable nonetheless, there are a lot of micro factors at work. See today Ryanair buying 100 Boeing MAX 737's. These planes carry more passengers and are 18% more fuel efficient than the planes they replace. Ryanair spends €2 billion a year on jet fuel, so if they manage to replace their whole fleet its a €380 million saving. Equally it is 20 million less tons of jet fuel needed per year - equivalent to 150 barrels of oil per day - which is about 0.3% of global output of jet fuel. And this is just one company.
With the move towards more efficient engines, improved power stations and more renewables, plus the shale oil and gas revolution, it is likely than until war hits Saudi and Qatar, the oil price will remain weaker for some time to come.