Forecasts: oil, a drop in demand in 2016?

According to the IEA, the International Energy Agency, world-renowned for its medium-term oil market research reports, world oil supply in 2016 would still exceed world demand by 1 million barrels per day. A situation that should lower oil prices per barrel and thus global stock markets

Iran: One of the causes of the increase in global supply?

This increase in global production is partly due to the entry into force of the nuclear agreement, which implies the end of the financial and economic sanctions imposed by the West on Iran. As a result, the Islamic Republic now intends to increase its production capacity by 700,000 barrels per day, offsetting the excess production of producers who are not members of the Organization of Petroleum Exporting Countries (OPEC). On the US side, oil production is on the rise and Saudi Arabia’s refusal to reduce its production is added to this. All these factors have resulted in an increase in the global supply of oil.

A declining demand?

Exceptionally mild temperatures during the first part of the winter in Japan, Europe and the United States, as well as economic slowdowns in China, Brazil, Russia and other commodity-dependent economic countries, have reduced global demand for oil. Many industries such as automotive, textiles, steel, and household appliances are stagnating in China, resulting in a decrease in global demand of nearly one million barrels per day. The drop in oil prices can only be reinforced. Oil producers therefore expect a difficult year in 2016, the third in a row

oil price falls

The consequences for the Euro Zone:

This drop in oil prices has positive consequences for the euro area from an economic point of view. Indeed, although the European currency has depreciated by 10% against the US dollar since the beginning of 2014, the price of oil has also fallen by 17%. This amounts to a 7% drop in the price of oil in euros. This will have a positive impact on the euro zone, which will be able to benefit from the depreciation of the euro on its exports.

It should be noted, however, that the inflation rate in the euro zone could very well turn negative if the price of oil continues to fall. OECD (Organisation for Economic Co-operation and Development) countries are likely to grow as a result of lower oil prices. However, regions with already very low inflation should be concerned. The good news is also shared with countries with “normal” inflation (the United States, Japan or the United Kingdom).

The European Central Bank still wants to act:

Although this drop in oil prices benefits the euro zone and the resulting disinflation is positive, it is quite possible that the European Central Bank will pursue a much more expansionary monetary policy, worrying about lower inflation compared to its 2% target.