Daily Management Review

Global Glut Forces Oil Prices to Hover Around Near 11- year Lows


Global Glut Forces Oil Prices to Hover Around Near 11- year Lows
Under pressure from slowing global demand and abundant supplies and with Saudi Arabia signaling no change to its oil policies and Iran preparing to ramp up exports, oil prices steadied not far off their 11-year lows on Tuesday.
International benchmark Brent stood less than a dollar away from its 11-year low of $35.98 reached last week and traded below $37 per barrel.
Since prices started tumbling in June 2014 on the back of a U.S. shale oil boom and OPEC's kingpin Saudi Arabia decision to pump near record volumes of oil to stifle higher-cost rival producers, both crude benchmarks are down by more than two-thirds of their price.
With spending cuts, reforms to energy subsidies and a drive to raise revenues from taxes and privatization, Saudi Arabia announced plans to shrink its record $98 billion state budget deficit on Monday.
"The budget likely signals no near-term changes to energy or foreign exchange policies," analysts from Bank of America Merrill Lynch said in a note.
The world's oil production has at times exceeded demand by over 2 million barrels per day in 2015 since Saudi Arabia and Iraq have added extra barrels to the market over the course of this year.  
Since Iran is pledging to add at least another 0.5 million bpd into the market when and if Western sanctions on the country are lifted, the glut is expected to further aggravate in 2016.
"The pre-Christmas rally in crude oil has ground to a halt as the countdown to the New Year starts. Iran is gearing up to flood the market with 500,000 bpd within weeks of sanctions being lifted, while the ceasefire in Libya may also add extra barrels," said Ole Hansen, the head of commodity strategy at Saxo Bank.
Counting on global demand growth, Saudi Arabia and its Gulf allies the UAE and Kuwait hope to re-balance the market over the course of 2016.
However experts are predicting a further slower growth in demand for oil in 2016 after a spike in 2015.
"The demand situation does not support a return to a higher price environment," said derivatives exchange operator CME Group.
With a loss of 170,000 barrels per day (bpd) year-on-year, oil product demand growth in Europe turned negative in October for the first time in 10 months, say the oil analysts JBC Energy. Compounding this is the slowing demand for diesel and gasoline in China, one of the strongest price supporters of the past year.
Following an unusually warm start to winter, colder weather entering Europe and North America may provide a mid-term boost to prices in the short-term.
A 6-10 day forecast showed the likelihood of colder weather for the U.S. East Coast, a key region for heating fuel demand, said MDA Weather Forecasts.
Continental average temperatures are expected to fall from almost 6.5 degrees Celsius, 4 degrees above the seasonal norm, towards more typical levels of 2 degrees Celsius by Jan. 1 in Europe, says Reuters meteorological data.
WTI flipping to a premium versus Brent this month after the United States lifted a decades-old ban on exporting U.S. crude oil has been one change in oil trading.
Should global markets suffer from slowing demand and a continuing oil surplus while domestic supplies in the United States tighten, analysts expect this price structure to stay in place.