Just when the recent resurgence in international oil price led many believe that the worst is over, the International Energy Agency (IEA) came up with the notion that the bottom of the market may still be ahead. Recall that Brent crude had fallen to as low as $45/bbl, having regained some stability hovering around $58/bbl for the past few weeks.
The IEA, known as the most credible global authoritative source on energy, in its recent call said the oversupply in the market is likely to persist, and something has to give if status quo prevails. And the production has shown no signs of receding, all thanks to the Opec nations, most of whom recorded all time high production in June.
“The world oil market is unable to absorb the huge volumes of oil now being produced,” said IEA. And there is ample evidence to suggest the notion has credence. The rise in production has come at a time when global demand from major oil users especially China has slowed down. Various agencies have also slashed the oil demand forecast significantly – to as low as 1.2 million barrels per day for 2016.
In a scenario where non Opec members are expected to face a halt in production growth, the war to regain market share is likely to get intense. Saudi Arabia and the likes are still reluctant to settle for lower production despite US shale revolution. Most analysts believe the Saudis can afford lower oil price for another couple of years before thinking of a production cut.
The extraction and drilling cost for all others is manifolds for most non Opec producers and that is what gives Saudi Arabia the edge. Although, the Kingdom for the first time in many years has borrowed $4 billion from the local markets in the past year in an effort to maintain high levels of public pending as oil prices recede.
So from what it appears, weak global demand and steady production signal an extended period of oil price slump before we talk about stability in oil. Pakistan, meanwhile can take a lot of heart from the news – as lower oil prices for a long period could offer the country a much needed breather.
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