Demand-supply imbalance impacts on crude oil prices

Dynamics within the oil industry are starting to shift as the world’s general economy is slowing down while oil production levels continue to rise.

Brent crude oil price per barrel went up to $118.6 on the first quarter of 2012 as oil supply issues escalate owing to conflicts with Iran and mounting pressure in the Persian Gulf.

Percentage-wise, Brent rose by 14 percent for the first quarter of the year, but slid 2.8 percent by April. According to the International Energy Agency (IEA), oil markets were seen to have relaxed a bit, based on first quarter figures. In terms of oil supply, IEA Executive Director Maria van der Hoeven announced that it is too soon to make a statement whether or not it has really improved. Nevertheless, IEA assured that it is prepared to call for release of oil reserves if market conditions warrant it.

OPEC’s approach to oil production seems to contradict current demand. While the growth of world economies in general has taken a slower tempo, OPEC has been producing oil at surprisingly high rates.

In fact, it has produced record high volumes of oil, the biggest production so far since April 2008. Countries that make up OPEC had likewise produced oil beyond their agreed limit which is already set at 30 million barrels per day.

A disparity seems to exist now that OPEC’s oil production volumes are up despite the fact that demand for the same commodity is down. This mismatch, along with rising unemployment in countries like Germany, threats of recession in Europe, and a slow-moving U.S. jobs market has triggered a drop in current crude oil prices.

Moreover, this imbalance resulted to a build-up of oil inventories. Oil reserves in some countries were estimated at 59.6 days of demand. IEA disclosed that this is the highest average since 2009. Forecasts by the Center for Global Energy Studies also reveal an upswing in global oil stockpiles by the second quarter and may increase to 1998 Asian-crisis levels.

Blackstone Group Chairman, Byron Wien told Bloomberg that oil inventories might expand further and that risk premiums will be tucked into Brent crude prices.