Oil prices have remained stubbornly high this year, with Dated Brent currently averaging more than $110/barrel, seemingly at odds with the worsening economic outlook in many key oil-consuming countries.
But despite all the attention being given to the parlous state of many western economies, fundamental market tightness lies behind the apparently paradoxical sustained high crude prices we have seen, according to the International Energy Agency.
In its September oil market report, the IEA said demand had been outpacing supply since the middle of 2010, leading to a depletion of stocks. In the second half of last year the supply shortfall was around 1.4 million b/d, while in the first six months of this year the deficit was closer to 500,000 b/d.
At the end of this period, OECD oil stocks in July 2011 dipped below the average level over the last five years for the first time since June 2008, the IEA said. This situation continued in August, when an estimated stock build of 600,000 barrels fell well short of the normal increase for the month of 14 million barrels, despite the release onto the market of oil from emergency stockpiles of IEA member countries. This tightness now looks set to ease, the IEA said.
With demand forecasts being revised down as a result of the increasingly gloomy economic outlook, the IEA expects the call on OPEC crude--which broadly measures the amount of oil the cartel's members would have to pump in order to balance supply and demand--to fall too.
Demand for OPEC crude in the fourth quarter of this year and the first quarter of 2012 is now estimated at around 30.5 million b/d, not much higher than the group's current production.
Adding in more hypothetical factors, such as the partial return of Libyan oil to the market or any further downgrade to oil demand estimates, would point even more strongly to an easing of market tightness in the coming months.