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Winter freeze and economic recovery lifts oil prices

An exceptionally cold winter in the US and a mild economic recovery in Europe fuelled stronger than expected demand across developed economies, lifting oil prices in February

WTI, the US benchmark, was trading at around $100 a barrel on 17 February, up from $95/b a month earlier. It was the highest level since mid-October 2013. Brent crude saw smaller gains. It was trading at around $109/b on 17 February, up from around $106.50/b a month earlier.

In a note titled The Glut That Never Was, the International Energy Agency (IEA) warned that contrary to forecasts of a flood of new supplies, “markets have had to dig deeply into inventories to meet unexpectedly strong demand.” OECD commercial stocks fell by 137 million barrels (1.5m b/d), according to the IEA, the largest quarterly stockpile decline since 1999.

OECD demand, led by the US, was surprisingly strong in late 2013 and the first part of 2014, making up for a slowdown in the rate of China’s demand growth. The IEA had predicted a continued decline in OECD overall demand in the second half of 2013, but demand rose by 370,000 b/d in the third quarter and 300,000 b/d in the fourth quarter. Global demand growth in the second half of 2013 was 500,000 b/d higher than the level forecast by the IEA in mid-2013.

At the same time, crude production continues to disappoint. “Oil output shortfalls continue to be an overarching theme in the global supply system,” Barclay’s analysts noted in a research note. Problems across Opec continue to constrict output. Outages from Iran (sanctions), Libya (violence), Iraq (violence), Nigeria (theft) have averaged around 2.5m b/d between August 2013 and February 2014, according to Barclays, about twice the level from the same period a year earlier. “At this time of year, when the global oil market enters a season of lower demand, it is common for market participants to worry about excess supply or the perceived need for Opec production cuts. Such concerns today would be particularly misplaced, as the market needs to replenish exceptionally low stocks,” the IEA warns.

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