Why the oil market didn't need the Doha freeze after all

When markets opened Monday morning, the price of oil dropped like a rock, as the market absorbed the news that the much anticipated oil production freeze meeting in Doha, Qatar didn't amountto much. But oil soonrecoveredand traded Tuesday above $42 US a barrel.

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Why? Is it because of a strike byoil workers in Kuwait? Or pipeline sabotage in Nigeria?Partly. But energy analysts sayit's also because the global oil market didn't really need the Doha agreement. It's already in the midst of re-balancingitself.

Supply down

Energy economist Peter Terzakian of ARC Financial published a blog post that called the Doha effort hopeless and said that the world market is notdepending on a squabbling group of world leaders with opposing agendas, but is sorting itself out on its own

Production peaked in the United States in June and had fallento under 9 million barrels per day as of two weeks ago. That's the lowest level of U.S. production in eighteenmonths. It's expected that by the end of the year, U.S. production will have fallen by between700,000 to 1 millionbarrels a day. In Canada, conventional production meaning non-oilsands is off by 20 per cent from its most recent peak,while oilsands production still grows slowly.

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"Wedidn't expect much from the freeze," said Judith Dwarkin, an energy economist with RS Energy Group. "Most of the producers in question would havelikely havebeen frozen at or near their maximum production capacity.Therefore the lack of the freeze isn't really changing the fundamental picture in the near term."

Demand up

Meanwhile oil demand continues to move higher. Estimated to be just over95 million barrels a day right now, it's expected togrow to more than 96 million barrels a day during the summer driving seasons, as North Americans hit the road in all the SUVs they have bought in thepast year. It'sexpected to grow to 100 million barrels a day by 2020.

The world is dealing with an approximately 1.5 million barrel per day structural overhang in supply.Interestingly, with the current supplydisruptionsin Africa and the Middle East, theoil market is actually in balanceright now, although that effect will be temporary.

Dwarkinsaid that over the next 12 months, signs are that the structural surplus will start to wane, as U.S production slows and demand grows. At that point, there will bestorage tanks on and offshore filled with oil waiting to be used up. Once that draw-down starts to occur the prices are expected torise, toward the end of 2017

That probably seems like a long way awayfor struggling energy producers in Canadaand governments that rely heavily on oil revenue.

There's always the chance that OPEC and non-OPEC producers will decided to hold hands and get along, but Dwarkin says people shouldn't hold their breath.

"I think that by the time of the next OPEC meeting in June, the market will be starting to look quite different from the way it looks now."

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