The International Energy Agency just threw a bucket of ice water on oil bulls, reporting that crude supply is outpacing demand by 600,000 bpd and slashing its demand outlook for the year. And the IEA isn’t alone. The world’s biggest oil traders are also sounding the alarm, turning bearish as overproduction ramps up both inside and outside OPEC.
“The industry is over-drilling now, that is clear,” Gunvor’s chairman Torbjörn Törnqvist told Bloomberg in an interview on the sidelines of CERAWeek. “We are drilling more inside and outside OPEC than demand growth warrants.”
Indeed, production is on the rise. The U.S. Energy Information Administration said in its latest Short-Term Energy Outlook that it expected U.S. output this year to gain 400,000 bpd to 13.6 million barrels daily, which would solidify the country’s status as top global producer—and a major reason for the weakness in oil prices.
Yet OPEC+ is also producing more, or rather, some members of the group are producing way over their quota. In the latest update from the cartel, Kazakhstan was the main overproducer, with an average daily rate of 1.767 million barrels in February versus a quota of 1.468 million barrels daily. Nigeria also overproduced, although less dramatically, exceeding its ceiling by some 70,000 barrels daily.
Meanwhile, on the demand side, it appears that many have concerns related to President Donald Trump’s approach to trade policy, namely tariffs. The concerns focus on tariffs hurting demand for crude as they make various goods more expensive. Some tariffs might also have a negative effect on oil and gas industry costs, specifically the steel and aluminum tariffs the Trump administration announced earlier this week. The effect, however, is likely to be modest.
This will not be the case with refining in the United States, where as much as 400,000 bpd in processing capacity is scheduled to be shut down this year. Two refineries—one in Los Angeles and another in Houston are slated for a shutdown in 2025, which would leave more crude available on the market.
According to the chief executive of Vitol, Russell Hardy, the current developments in supply and demand could push oil prices consistently lower, to between $60 and $80 per barrel. Hardy also said that West Texas Intermediate could dip below $60 per barrel at some point, though likely not for long. In fairness, it would not be the first time when overdrilling has led to price dips that have served as a natural correction for excessive production activity and there is no reason the current situation should be an exception to that rule.
Meanwhile, one prominent oil analyst has said that the world has entered the era of peak oil trading. According to Jeff Currie, formerly with Goldman Sachs and currently with Carlyle, the international oil trade peaked in 2017 and has since been on the decline due to the rise in wind and solar electricity that is produced locally.
“The share of global energy consumption that came from fossil fuels that crossed borders peaked in 2017, and has since declined by 5%,” Currie wrote in a note cited by Bloomberg this week. In it, the analyst noted that while oil is a reliable source of energy, its cross-border trade is increasingly vulnerable to developments such as Trump’s tariff push, for example. According to Currie, this vulnerability will serve as motivation for boosting reliance on wind and solar.
JP Morgan’s latest energy report counters this view, with its author, Michael Cembalest, noting that “after $9 trillion globally over the last decade spent on wind, solar, electric vehicles, energy storage, electrified heat and power grids, the renewable transition is still a linear one; the renewable share of final energy consumption is slowly advancing at 0.3%-0.6% per year.”
This suggests that while the market balance for oil looks like it is leaning into oversupply, it may not necessarily be an accurate picture. Demand has surprised on the positive side repeatedly, countering estimates, with the most notable recent example from last year, when the EIA had estimated a slump in fuel demand in late spring, but the actual numbers showed a surge to a record high.
Another recent example that teaches to take all forecasts and estimates with a pinch of salt came from none other than the IEA’s head himself, who called for more oil and gas investment at CERAWeek, saying, “There is a need for oil and gas upstream investments, full stop,” four years after he said in the IEA’s Road Map to Net Zero that the world needed no more investments in new oil and gas supply because the transition was going to succeed.
It seems, then, that at this point in time, oil prices seem set for an extended period of depression as supply appears to exceed demand consistently and producers have yet to feel enough pain to curb their activity. However, a lot of that comes from forecasts and estimates that may turn out to be inaccurate. This, in turn, would lead to a price correction whose size would depend on just how accurate or inaccurate the forecasts and estimates were.
By Irina Slav for Oilprice.com
