With global demand forecasts being revised lower while supply continues to rise, North Sea Brent crude oil prices have fallen to about $91/bbl—the lowest level in more than 2 years and 21% lower than its 2014 daily peak of $115/bbl on June 19.
Prior to its recent decline, average monthly Brent spot prices had traded within a narrow $5 per barrel range, at $107-112/bbl, for 13 consecutive months through July.
“During that period of low price volatility, substantial oil supply disruptions in the Organization of Petroleum Exporting Countries were offset by increases in US production and weaker-than-expected global demand. More recently, however, the resumption of significant Libyan oil production, combined with the weakening outlook for global oil demand, has put downward pressure on prices,” the US Energy Information Administration said.
The sustained increase in Libyan production over the summer—increasing from 200,000 b/d in June to 900,000 b/d at the end of September—has weighed on an already well-supplied light, sweet crude market in the Atlantic Basin, despite the fact that Libya’s recent production has not come close to its previous level of 1.65 million b/d in 2010 and 2011, before the Arab Spring.
“Over the past several years, increasing US light, sweet crude production has significantly reduced light, sweet crude imports to the US. Those reduced imports, which were sourced primarily from Africa, became available to replace Libyan production lost during a time of civil war and subsequent unrest. While Libyan production was disrupted, supply and demand in the Atlantic Basin was relatively balanced. However, as Libyan production has returned and has remained largely online despite internal unrest, the price of Brent crude oil has fallen,” EIA explained.
Weakening global demand, particularly in Europe and Asia, has also been an important factor putting downward pressure on the Brent price. Economic growth in 2014 outside of the US has been slow, and recent data releases appear to confirm lower-than-expected growth, particularly in Asia and Europe.
China reported that its industrial production has risen at the slowest pace since 2008. In Europe, the Organization for Economic Cooperation and Development has reduced expectations for economic growth through 2015 after data showed second-quarter gross domestic product fell in Germany and Italy and stagnated in France.
Near-term seasonal market conditions are also affecting crude demand, as substantial refinery maintenance in the US, Europe, and Asia takes place in September and October, reducing crude demand.
However, the current oil market landscape could be altered by many factors.
“Seasonal refinery maintenance should be completed before the end of the year and, as a result, demand for crude should increase. On the supply side, there remain significant geopolitical risks, including heightened tensions, and in some cases open warfare, in key producing regions. In addition, Saudi Arabia, which recently cut production by 400,000 b/d, could make further production cuts,” EIA said.