KUWAIT: Continued high oil inventory levels globally during 2015 coupled with rising oil supply with OPEC producing at historical high production rates led to a second consecutive year of fall in oil price in 2015. OPEC oil price declined by 40 percent during the year after a 52 percent slump during 2014 as the supply demand gap worsened also due to an exceptionally mild winter temperatures in the US and Europe during Q4-15. The year also saw two OPEC meetings that failed to decide on production caps for its member countries despite the situation severely affecting the respective state budgets.
Moving into 2016, oil market saw further pressure at the start of the year when economic sanctions over Iran were lifted sending oil to its lowest level since 2003. OPEC oil closed at $ 23.6/barrel on 18-January-16, a decline of almost 26 percent as compared $ 31.3/barrel at the end of 2015. The lifting of sanctions over Iran could add another 0.5-0.6 mb/d of additional oil in the market by mid-2016. However, in order to reach pre-sanction levels, Iran could require an investment of around $ 150 Bn, which could delay the production ramp-up considerably.
According to the IEA, 2016 is once again expected to see supply exceed demand by almost 1 mb/d on the back of a first half loaded supply that will decline slightly during the second half. The agency expects non-OPEC production to decline by 0.6 mb/d, slightly lower than the 0.66 mb/d decline expected by OPEC in its latest monthly report; however, this decline is expected to be offset by more Iran oil pouring in the market. On the positive side, talks of production cut gained momentum after Oman said it is ready to slash production by 5-10 percent if other countries decide to do so in order to stabilize oil prices.
The economic slowdown in China, which is undergoing a transition to a more consumer-led expansion, was one of the key factors that affected global economic growth and oil demand. According to preliminary estimates, China recorded a GDP growth of 6.9 percent in 2015 (7.3 percent in 2014), the lowest growth recorded in the past 25 years (since 1990), after consistent decline in quarterly GDP growth during the year. The country also recorded 10 consecutive months of PMI contraction recorded during December-15.
The uneven distribution of growth across the globe was also one of the key factors that affected oil prices during the year. Moreover, risk is expected to be on the downside for a majority of the economies, including fragile recovery in Europe and other emerging and developing markets partially offset by apparently improving fundamentals in the US. On the other hand, oil importers that got a windfall gain from lower oil prices were affected due to the strengthening dollar, especially after the US rate hike decision in December-15 and the competitive devaluation of emerging market export oriented currencies.
Average monthly oil prices reached the lowest level since April-04 to reach $ 33.6/b during December-15. The year saw a decline of $ 20.7/b to reach $ 31.27/b for OPEC oil. The price had already declined to $ 23.58/b on 18-January-16 following trade and manufacturing data from China coupled with depressed sentiments since the start of the year on the back of continued weakness in global economic fundamentals. The latest update from the IMF further lowered global growth expectations to 3.4 percent and 3.6 percent for 2016 and 2017 from 3.1 percent in 2015 as the agency expects growth pickup to be more gradual than previously expected. Advanced economies are expected to post uneven and modest recovery whereas growth in emerging and developing markets are expected to be diverse but challenging.
Oil demand growth in 2016 was also increased slightly to 1.26 mb/d to average around 94.17 mb/d according to the latest OPEC report. However, the latest IEA report says, while highlighting the negative impact of a strong $ on oil importers, oil demand is expected to grow at a relatively slower pace of 1.2 mb/d. According to OPEC, oil demand in OECD Americas is expected to rise on the back of economic improvements in US and Mexico whereas Canada is expected to see slight demand growth. For OECD Europe, oil demand is expected to slightly decline due to economic uncertainty and downside risks on related to taxation policies and fuel substitution. OECD Asia Pacific is expected to see a steeper slide in oil demand on the back of bearish economic forecasts for Japan partially offset by higher demand in South Korea. In the Middle East, Saudi Arabia is expected to be the key driver of demand growth partially offset by subsidy reductions.