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The imbalance in the oil market won’t go away quickly

Scott Tong Jan 19, 2016
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The International Energy Agency put out a report suggesting the world’s relative glut of oil will continue well into 2016, stating “the market could drown in oversupply.” World supply could outrace demand by at least a million barrels per day for the third year in a row. A big reason: Iran wants to export more crude with sanctions starting to lift.

A small overhang could push prices down significantly, due to the price-war effect.

“What it would require would be deep discounts to lure a buyer away,” said energy economist Guy Caruso, formerly of the IEA and now with the Center for Strategic and International Studies. “So if you’ve got Iran there saying, ‘okay, we’ll give it to you for 25 so you don’t have to pay the Saudis 28,’ they might lure a little bit away.

Indeed, Chinese President Xi Jinping is right now visiting the Middle East. China is the world’s top net oil importer.

Just a tiny oversupply in the global market can shoot prices down dramatically, as it’s hard for suppliers to get rid of their surplus oil. It’s not as if car owners will suddenly drive additional carpools with oil prices low. Or go out and buy guzzlers immediately.

“You may in fact say to yourself, ‘gas is only $2 a gallon right now, but geez, I’d hate to buy a Hummer and have prices go up next year to $4 a gallon,’” said energy economist Gilbert Metcalf of Tufts University. “People are not going to change their behavior that much in the short run.”

Economists call this inelastic demand. At some point, though, more drillers will go under at these prices, supply growth will slow, and demand from the world’s drivers will catch up. And prices will reflect a world market in balance.

Until that comes, cheap oil will remain a good deal for consumers, and a scenario for more carnage for producing companies and petro nations.

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