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Low demand and high supply drive oil prices lower

Hydrocarbon Engineering,

According to the US Energy Information Administration (EIA), the price of North Sea Brent crude oil has fallen to approximately US$ 91/bbl, the lowest level in more than two years and approximately 21% lower than its year to date peak of US$ 115/bbl on 19 June. Before its recent decline, average monthly Brent spot prices had traded within a narrow US$ 5/bbl range, from US$ 107 – US$ 112/bbl, for 13 consecutive months through July 2014.

During that period of low price volatility, substantial oil supply disruptions in OPEC were offset by increased 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 sustained increase in Libyan production over the summer, increasing from 200 000 bpd in June to 900 000 bpd at the end of September, has added supplies to 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 bpd in 2010 and 2011, before fighting that occurred during 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 the time of the 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 has fallen.

Although the return of significant Libyan production has been an important factor putting downward pressure on Brent price, weakening global demand, particularly in Europe and Asia, is also important. 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, according to the EIA.

China reported that its industrial production has risen at the slowest pace since 2008. In Europe, the OECD has reduced expectations for economic growth through 2015 after data showed second quarter 2014 GDP fell in Germany and Italy and stagnated in France.

Near term seasonal market conditions are also reducing crude demand, as substantial refinery maintenance in the US, Europe, and Asia takes place in September and October, reducing demand for crude.

Adapted from a press release by Emma McAleavey.

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