It comes down to supply and demand.
On the demand side, the Organization of Petroleum Exporting Countries (OPEC) and some others express official optimism that a resurgent global economy will offset the supply glut. But the evidence for that demand renaissance has a few holes in it.
In Japan, the world’s fourth largest oil consumer, imports fell by 13.5 per cent last month, but that’s consistent with the long-term trend: according to the EIA, demand has fallen by nearly one-quarter over the past decade.
In the United States, the expected warm-season surge in gasoline demand has failed to materialize, and the EIA predicts total petrol consumption growth this year will be basically flat.
China — the world’s biggest net importer — has a big supply problem of its own. Gasoline and diesel reserves are so high that some of the country’s biggest refineries are poised to shut down for the entire third quarter, amounting to about 10 per cent of China’s total refining capacity, according to Reuters. That doesn’t bode well for resurgent global demand, at least not this year.
On the supply side, the North American shale industry has continued to grow at the expense of OPEC. Simply put, OPEC’s production cuts have led to prices that, while low, are still high enough to keep U.S. and Canadian tight-oil producers solvent. According to oilfield services company Baker Hughes, the number of rigs in the U.S. increased to 1,092 during the week ended June 16, marking the 22nd week in a row that the rig count has risen. In Canada, meanwhile, Baker Hughes reported an increase to 159 rigs — 2.3 times the number at the same time last year.
Meanwhile, Libya and Nigeria — two OPEC countries exempt from the production cuts because they’re grappling with de facto civil wars — have got their act together enough to ramp up production. So has Iraq. As a result, overall OPEC output in May — the same month the cartel agreed to renew its caps — rose by more than 330,000 barrels a day.