The oil market is in a state of flux. Oil prices are close to a quarter of their level 18 months ago. Over the past two years, the supply of oil has grown at its strongest rate for more than a decade, fuelled by the US shale revolution. China, the world’s most important growth market for oil, is in the throes of a fundamental rebalancing of its economy. And the commitments made at the COP21 climate change meetings in Paris have raised a question mark over the long-term prospects of all fossil fuels. Not surprisingly, much of the current attention is focused on the near-term prospects for oil. Just how low will oil prices fall and for how long?
On that question, there are clear signs that the oil market — just like any other market — is responding to the prompt of lower prices. Global oil demand in 2015 increased by more than twice its 10-year average and looks set to grow strongly again this year. And supply is beginning to wilt: US shale production is already well off its peak levels of last spring and is likely to continue to fall through much of this year. Based on those trends, and even with the prospective increase in Iranian production, the oil market is likely to move closer into balance by the latter part of this year. That will still leave a significant inventory overhang that will take some time to work off. But it seems likely that the market will show at least some signs of turning by the end of this year.