A dramatic fall in the price of oil in recent months shows no signs of ending, according to the International Energy Agency (IEA), which states that weak demand, a strong dollar and booming U.S. oil production mean that a new chapter in the history of the oil markets is beginning which could affect the social stability of some countries.
Prices have declined by around 30 percent since peaking in June, with Brent crude crashing below the $80 level in early November. On Friday, the commodity was trading around a four-year low at $78 with speculators looking ahead to a meeting in Vienna later this month where the Organization of the Petroleum Exporting Countries (OPEC) could look to cut production in the wake of the price falls.
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'No clear consensus'
The IEA says that there appears to be no "clear consensus" from the Gulf states for a formal supply cut and predicts further downside pressures for the price of oil in the next few months.
"Supply/demand balances suggest that the price rout has yet to run its course," the IEA said in its new monthly report, released on Friday morning. "Our supply and demand forecasts indicate that barring any new supply disruption, downward price pressures could build further in the first half of 2015."
It admits that steep price declines tend to be self‐correcting over the long run but adds that a return to previous price highs may not be a close prospect. China has entered a less oil‐intensive stage of development and innovative new technologies in North America mean that there are "deep structural changes at work in the oil market," according to the IEA.
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"It is increasingly clear that we have begun a new chapter in the history of the oil markets," it said. "Economic development no longer spurs oil demand growth as it once did, especially in the absence of wage gains."
Demand projections
The agency left its yearly forecasts for global oil demand unchanged from last month, with an estimate of 92.4 million b/d (barrels a day) for 2014 and 93.6 million b/d for 2015. Demand growth is now projected at 680 kb/d in 2014 which would be a five-year annual low, according to the IEA.
However, this will rise to 1.1 million b/d next year as the macroeconomic backdrop is expected to improve, it said. It added that despite expectations for a rebound in global economy in 2015, this wouldn't necessarily prevent seasonally weaker demand for oil.
"While our projections suggest that year‐on-year demand growth will recover to 1 million b/d in (the first quarter of 2015) and 1.2 million b/d in (the second quarter) from 770 kb/d in (the fourth quarter of 2014), demand is nevertheless expected to fall steeply early next year from end‐2014 levels, in line with seasonal patterns," it said.
Social stability warning
On Wednesday, the IEA warned that the oil rout may cut investment in U.S. shale oil by around 10 percent next year and said Friday that this shouldn't not be misconstrued as a production drop and would likely pale in comparison with recent gains in shale productivity.
Across the globe, many oil-producing countries are finding that their "fiscal breakeven price" is well above the current oil price, it said. The IEA warned that Venezuela is "reeling" from the effects of falling production and plummeting prices and Russia is suffering from both the oil price drop and a currency collapse.
"While that will not necessarily make oil production at current or even lower prices uneconomical, it may take a toll on social stability, and thus indirectly affect production prospects," it said.