Crude prices are on levels last seen some seven years back in 2009 — while the world was in the midst of a major recession. By Friday evening, oil tumbled to its biggest weekly decline of the year after an International Energy Agency report highlighted the magnitude of the global crude glut. US oil futures for January delivery fell $1.14, or 3.1%, to $35.62 a barrel on the New York Mercantile Exchange. Brent fell $1.80, or 4.5%, to $37.93 a barrel on ICE Futures Europe. Both lost about 11% for the week, putting them down a third for the year and at their lowest settlement since the financial crisis. US oil last settled this low in February 2009 and Brent in December 2008. And already there are indications that the next year is going to be no better. Fatih Birol, executive director of the Paris-based IEA, said oil prices could fall (further) in 2016. "When we look at 2016, I don't see many reasons why we can see upward pressure on the prices... Demand is weaker and we may well see Iran come back (to the market) and there will be a lot of oil," Birol was quoted as saying from the sidelines of the COP21 climate conference in Paris. Crude market prices have tumbled over the last 18 months, from a high of $114 last June. And the situation is so alarming, that on Friday, Russia's deputy finance minister issued a stark warning of $40-$60 oil "for the next seven years." Industry is worried. It could get still tough. Output continues to go up, despite a slowing demand growth. In a just released report, the International Energy Agency says that amid an "unrelenting" oversupply of crude, the growth in the world's demand for oil is also set to slow next year. The "first signs of a slowdown" in global oil demand had been seen in the fourth quarter of 2015, the IEA said in its latest report published Friday. "Global demand growth of 1.2 million bpd is forecast in 2016. This is a notable slowdown from the five-year high hit in 2015. Early indicators for the fourth quarter of 2015 show growth easing to 1.3 million bpd year-on-year from a third quarter peak of 2.2 million bpd, the IEA noted. Explaining the reason for this sharp slowdown in demand growth, the IEA felt the factors that contributed to a rapid increase in oil use this year are likely to prove temporary." The IEA further added that weaker US demand conditions since September were "a key contributor to the downside." And just as global oil demand growth was showing signs of a slowdown, the global oil supply inched up in November to 96.9 million bpd, IEA reported. "Total supplies stood 1.8 million bpd above a year ago, with OPEC accounting for the lion's share. Non-OPEC supply held at 58.5 million bpd in November, as its annual growth slowed to below 300 kb/d from 2.2 million bpd at the start of 2015." Nonetheless, the IEA noted that despite the price drop and slowing demand growth, OPEC crude output edged 50,000 barrels a day higher in November to 31.73 million bpd "with record production from Iraq and higher supply from Kuwait offsetting losses from African members." All this is piling up pressure on the markets. KPMG is now asserting that the expectation that the price will be "lower for longer" is stretching into 2016, and making companies less willing or able to operate high-cost fields. "The next quarter is going to be particularly tough as we go from a high-demand to a low demand quarter," Richard Gorry, director of consultancy JBC Energy Asia told Reuters. He expected a slow rebalancing of the market towards the end of next year, with production remaining stubbornly high despite low benchmark prices. The price rout is apparently a result of a huge overhang in production that is fast filling onshore storage sites, which some analysts expect to run out in early 2016. ANZ bank said on Friday that "crude oil markets will remain subdued in 2016, though prospects for a recovery look better in the second half of the year." Jefferies bank said that an "inventory overhang is likely to expand significantly through the first half of 2016 and will likely suppress oil prices in the near-term." Ole Hansen, from Saxo Bank, told the Daily Telegraph, "the oil market is driven by fear." Soaring output from OPEC, particularly Iraq has been a large contributor to the overhang, with production there doubling over the past decade to around 4.3 million bpd. OPEC as a whole pumped more oil in November than in any month since 2008. And thus it has been a terrible week for oil prices. In the ongoing tussle for market, OPEC is taking a long- term view of the markets — to ensure a fair share of market to the world's most efficient producers. OPEC is not ready — any further — to support inefficient producers produce at the cost of efficient producers. The IEA too says the OPEC "move appears to signal a renewed determination to maximize low-cost OPEC supply and drive out high-cost non-OPEC production - regardless of price." The IEA hence underlined that "there is evidence the Saudi-led strategy is starting to work." "Lower prices are clearly taking a toll on non-OPEC supply, with annual growth shrinking below 0.3 million bpd in November from 2.2 million bpd at the start of the year. And it could get down by another 0.6 million bpd in 2016, as US light tight oil — the driver of non-OPEC growth — shifts into contraction." US shale oil production, the main driver of non-OPEC supply growth, is expected to fall for a ninth consecutive month in January; the US Energy Information Administration is now projecting. On Thursday, OPEC too emphasized in its latest monthly report that non-OPEC oil supply would contract further in 2016, a far cry from the "the tremendous growth of 2.23 million barrels a day achieved in 2014." And as the crude markets appear preparing for another plunge, with the bottom still to be seen, Birol is warning of the threats lurking — just round the corner. Not only the push to alternative sources are being compromised, the IEA is now reporting that investment in the oil industry has also fallen by more by 20 percent in 2015 — the steepest in history. And a further decline is very much on cards in 2016. And that should be the cause of real concern!
