Despite turmoil in the Middle East, an oversupply of oil is shielding markets against geopolitical unrest, the International Energy Agency has said in its monthly oil-market report.
The price of Brent crude oil, the most traded oil contract in the world, dropped to a 13 month low as the IEA trimmed its projection for growth in global demand for 2014 to 1 million barrels a day.
Brent crude fell to $103.02 a barrel and West Texas Intermediate fell to $97.37 a barrel.
“Despite armed conflict in Libya, Iraq and Ukraine, the oil market today looks better supplied than expected, with an oil glut even reported in the Atlantic basin,” the IEA’s monthly oil-market report said.
The IEA reduced estimates for global oil demand growth by 180,000 barrels a day in 2014 and by 90,000 barrels in 2015. The annual expansion in fuel consumption slowed to 700,000 barrels a day in the second quarter, the lowest level since early 2012.
The oil market seemed “eerily calm in the face of mounting geopolitical risks spanning an unusually large swathe of the oil-producing world,” said the report.
Theoretically, oil markets have plenty of reasons to be spooked.
Islamic State insurgents have swept through northern Iraq, home to the world’s fifth-largest crude reserves and have captured seven oil fields.
Exports of Libya’s oil reserves has only just started again, after militants seized control of the country’s biggest ports and cost Libya $14 billion in lost export revenue.
Sanctions punishing Iran for its nuclear weapons program have crippled crude exports by 1.5 million barrels a day.
And US and EU sanctions against Russia’s oil sector, the world’s largest oil exporter, after the downing of MH17 in eastern Ukraine have intensified tensions between the two countries.
But despite the last few years of tension, oil markets have remained placid with 2013 marking the smallest range of daily price movements in more than 10 years, according to the US Department of Energy.
Output from the 12 members of the Organisation of the Petroleum Exporting Countries (OPEC) rebounded in July, climbing 300,000 barrels a day and reaching a five-month high of 30.44 million a day. The increase is attributed Saudi Arabia’s output increase of 10 million barrels a day.
Libya, which has only just managed to wrangle back control of its ports from insurgents, almost doubled output to 430,000 barrels a day. That offset declines in Iran, Iraq and Nigeria.
“The Atlantic market is currently so well supplied that incremental Libyan barrels are reportedly having a hard time finding buyers,” the IEA said in its report. “Many in the market seem more focused today on potential short-term downward price pressures from a further increase in Libyan production.”
The IEA said the impact of Islamist State militants on northern Iraq production were “worrisome developments” but the disruption might be limited because of geography.
“The situation on the ground is highly fluid and infrastructure bottlenecks in the south, rather than the humanitarian disaster in the north, may remain the biggest hurdle to Iraq’s ability to deliver the supply growth expected from it in the medium term,” the report said.
Sanctions on Russia over relations with Ukraine and the annexation of Crimea are “highly selective” and are not providing much support to the oil market.
“Neither set of sanctions will have any tangible near term impact on supplies,” the IEA said. ”EU sanctions are highly selective. Their ‘perimeter’ seems loosely defined, potentially leaving room for finding ways around the most constraining measures.”
Middle Eastern oil production that has been lost over the last few years, which Citigroup estimates is 3.5 million barrels per day, has not only been offset by slowing demand but by the dramatic increase in US shale oil production.
Just as the Arab Spring swept through the Middle East in 2011, shale oil production in the US began to rise. According to the US Department of Energy, daily output has climbed to more than 8 million barrels of oil a day.
The US’s move towards energy independence has seen a dramatic impact on global energy trade. Petroleum imports now make up 28 per cent of what the US consumes, down from 60 per cent in 2005.
The oil US is no longer importing is now heading to Asia, which has helped keep prices immune from turmoil.
But there are concerns demand from China will slow as demand has fallen for the past two quarters, marking the first back-to-back decline since the global financial crisis.