Oil price at crossroads after shift in balance

What's Down: Oil producers and consumers see the dynamics of the oil market beginning to change, as high production levels are faced with a weakening global economy.

Oil producers and consumers see the dynamics of the oil market beginning to change, as high production levels are faced with a weakening global economy.

Tension in the Gulf and concerns over supply from Iran pushed prices up in the first quarter, when Brent averaged US$118.6 a barrel.

But Brent crude lost 2.8 per cent last month after a surge of 14 per cent in the first three months of the year. The International Energy Agency (IEA), the body representing 28 of the most industrialised nations, said the market showed a "slight loosening" during the first quarter. Speaking at the International Oil Summit in Paris, Maria van der Hoeven, the executive director of the IEA, said it was too early to say whether supply had improved and the IEA was ready to release stockpiles to the market if necessary.

Opec added its voice to the debate. The increasingly glum economic outlook is at odds with the organisation's production strategy, which has sought to support fragile economics and declining growth in Asia with a generous supply of oil.

Opec production reached the highest levels since 2008 last month, and its members comfortably exceeded the self-imposed ceiling of 30 million barrels per day.

Now a sluggish jobs market in the United States, an increase in unemployment in Germany and a string of European economies heading back into recession have led to declining demand for Opec oil, causing prices to fall.

The mismatch between production levels and demand has pushed up inventories. In February, reserves in consuming countries averaged at 59.6 days of demand, the most since 2009, according to the IEA. The Centre for Global Energy Studies expects worldwide stockpiles this quarter to rise to levels last reached during the Asian financial crisis 14 years ago.

Byron Wien, the chairman of Blackstone Group advisory services unit, believes inventories will keep swelling, and the risk premium will be taken from the oil price.

"The Iran premium is going to come out of the price of Brent," he told Bloomberg.

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