Things could easily yet get worse before they get better in terms of the global oil price as Iran’s new supply comes on line, but there is reason to think a turning point is nearing.
The fundamental thing to remember when considering the oil price slump of recent times is that it is a supply side issue first and foremost.
If there was any doubt about this before the recent Iran developments then the oil price reaction to news of Tehran’s return to the market eliminated that.
Yes global demand could be better, particularly that coming from China but this is secondary to the fact that production is too high.
OPEC, led by the world’s number one producer Saudi Arabia, has appeared to be a lesser force than it once was but they retain the power to cut back production virtually at the pull of a lever.
They have allowed the oversupply and price fall to continue with a view that short term pain will yield long term gain if they can force many of the fracking companies out of business.
Fracking, the clumsy shortening of hydraulic fracturing, requires a higher global oil price than exists at the moment to be profitable. The OPEC members would naturally like to see fracking companies fail as if they become fully established and secure in their market position it will mean persistent lower prices over the long term.
The first signs that this ruthless policy is working have begun to emerge.
Nikko Asset Management portfolio managers Simon Down and Daniel Forgie looked into the situation and pointed out that demand for oil is the highest it has ever been, as displayed below.
World Oil Demand (m b/d) Source: OPEC
