Oil Prices Drop after IEA Cuts 2014 and 2015 Demand Forecasts
An oil pump jack in California, US.Reuters

Oil prices have dropped after the International Energy Agency (IEA) cut its estimates for oil demand for 2014 and 2015, and suggested that the fuel prices may drop further.

Brent crude was trading $0.96, or 1.08%, lower to $87.93 a barrel at 12:41 BST, after dropping to $87.74 earlier in the day.

US crude was trading $0.87, or 1.01%, lower to $84.87 a barrel.

The global energy watchdog cut its 2014 estimate for oil demand growth by 200,000 barrels per day (bpd), from its previous forecast, and now expects demand growth of 0.7 million bpd to 92.4 million.

It cut its 2015 estimate by 300,000 bpd and now expects demand growth of 1.1 million bpd to 93.5 million.

The IEA said prices could remain under pressure because of high supply levels: Global oil supply rose by almost 910,000 bpd in September to 93.8 million bpd, about 2.8 million bpd higher than the previous year.

IEA chief analyst Antoine Halff told Reuters that producer group Opec, which supplies over a third of the world's oil, may no longer be willing or able to adjust production as the market has been transformed by the American shale oil revolution.

Some Opec members, whose economies rely on oil shipments, might prefer to keep selling at lower prices rather than lose their part of the market.

Halff said: "We should not expect Opec to necessarily play its traditional role of swing producer."

Commerzbank Corporates & Markets said in a note to clients: "Saudi Arabia appears willing to accept a lower oil price, but what is motivating the largest [Opec] producer here? One goal could be to force the other [Opec] members to accept a greater share of any later production cut so that it does not have to bear the main burden itself.

"Another objective could be for a lower price level to put the brakes on supply growth in other countries - worthy of particular mention in this context is the US, which in recent years has accounted for the lion's share of increased non-[Opec] oil production, and also looks set to do the same next year."

"Statements differ as to how high the marginal costs of production faced by US shale oil producers are. According to Maria van der Hoeven, director of the International Energy Agency (IEA), 82% of shale oil producers have a break-even price of $60 or lower. By contrast, IEA Chief Economist Birol claimed that US shale oil production needs about $80 in order to be profitable.

"This is precisely the level at which prices of Bakken oil and WTI Midland currently find themselves and which the shale oil producers at Bakken, Eagle Ford and Permian Basin are being paid at present.

"The slow response of US natural gas production following the collapse in prices in 2008/09 should make one cautious about expecting any swift reaction from US shale oil production, however. The weak global demand also argues against any price recovery in the near future...," Commerzbank added.