January 22, 2015

Taking a closer look at the global oil supply/demand balance

Global oil prices are at their lowest levels in six years. Supply is up and demand increases are sluggish. According to the International Energy Agency (IEA) oil prices have crashed by 60% since June.

By Melissa C. Lott

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This article was published in Scientific American’s former blog network and reflects the views of the author, not necessarily those of Scientific American

In Wednesday's "Visualizing a global price oil crash in three charts" I discussed the IEA's latest oil market report and their analysis of the current supply/demand mismatch. According to this international organization's analysis:

“The price of oil continued to collapse into January as rising supplies collided with weak demand growth and OPEC maintained its commitment to not cut production.”

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In the graph shown above, supply (the green line, starting just above the yellow line in 1Q09) and demand (the yellow line) are combined to better illustrate these differences. Furthermore, the solid blue bars show the implied mismatch between supply and demand within that quarter. Negative values - a.k.a. bars that face downward - mean that demand is outstripping supply in these periods. Conversely, the positive values seen since 2013 means that supply has been consistently higher than demand.

Quarter-by-quarter imbalances might not significantly impact global oil prices. However, the long stretch of positive values seen since 2013 shed some light on why global oil prices have plummeted and are expected to stay low in the near term. Noted here is that the IEA assumed that OPEC oil production rates will remain consistent through 2015 in their future projections.

Photo Credit: Graph from the International Energy Agency's Oil Market Report, 16 January 2015

H/T Paul Norton

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