No matter how much oil the world seems to consume lately, there's always a lot more to take its place. That trend will continue well into 2016, according to the International Energy Agency (IEA), in its monthly report.
On one hand, demand for petroleum is sharply higher, sparked by improving economic conditions in the U.S. and lower-than-normal fuel prices and growing at the fastest pace in 5 years. But according to the IEA, that's barely made a dent in supplies.
The report says the world oil supply fell nearly 600,000 barrels a day in July, mainly because non-OPEC producers cut back on production. Meanwhile, OPEC countries kept pumping like the price was going up, not down.
Price war
It's widely believed that Saudi Arabia has embarked on a price war strategy to put non-OPEC producers, particularly U.S. oil companies, out of business. OPEC production is clearly contributing to the supply glut that has forced world oil prices lower.
In August, IEA says OPEC crude production held steady near a three-year high. The goal is to force non-OPEC producers to cut back. IEA says it's working.
“As lower prices and spending cuts take a toll, non-OPEC supply growth is expected to slow sharply from a 2014 record of 2.4 million barrels day to 1.1 million barrels a day this year and then contract by 200,000 barrels day in 2016,” the report said.
But there is so much oil out there that it's not going to matter. Inventories aren't going down, they're rising. Inventories were up nearly 10 million barrels in June to hit another all-time high. With all that oil, the world's oil refineries are running at full tilt.
Refinery output
“Global refinery runs reached a record 80.6 million barrels a day in July, 3.2 million barrels a day higher than a year earlier,” the report said.
Looking ahead, IEA makes this prediction: OPEC will continue pumping nearly 32 million barrels a day and the world oil surplus will grow by 1.4 million barrels a day. At that rate, the agency says producers will have a hard time finding places to store all that surplus oil.
It will be the fourth quarter of 2016 – more than a year from now – before world oil demand starts to exceed production, the IEA predicts. That suggests oil prices, which have fallen below $50 a barrel in recent days, won't be going up anytime soon.
That's great news for consumers, of course, but it doesn't automatically translate into cheap gasoline. That's because all that crude oil must first pass through the bottleneck of refineries, where it is turned into gasoline and diesel fuel.
That's where short-term shortages have occurred, as routine maintenance and breakdowns at refineries have slowed output from time to time.
In addition, there are inefficiencies within the gasoline distribution system, which has caused abnormally high prices on the West Coast, particularly in California.