Oil price: needs a new gear

After flowing downhill throughout the second half of last year, oil prices have settled around $50 this year. Might the worst be over? Not yet. Credit Suisse believes that between 1864 and 2008, the four oil bear markets lasted on average two decades, and the shortest 11 years. Expect more pain ahead.

Rising inventories are one cause. Last year the gap between the cost of oil per barrel and that for several months (even years) ahead widened - sufficiently to enable traders to buy oil, store it and sell it forward profitably. That spread remains just wide enough to encourage more oil into inventory. In the US, the world's largest consumer, oil supplies have registered records for weeks. Energy Aspects thinks that the storage tanks, roughly two-thirds full, could hold more. It also believes that Iran, following the deal with the US announced on Thursday, could add 300k barrels a day to world supply.

Oil price bulls might retort that as oilfields age the production fades - perhaps 5 per cent annually. To cover that decline and meet new demand, the world needs more than 6m bpd extra (current output is 93m bpd). Opec does not have capacity to cover the looming shortfall for more than a year or two.

What could disappoint bulls is demand, which may struggle over the next few years. Consider consumption from transport. According to the International Energy Agency, 64 per cent of world demand stems from transport fuels, particularly petrol. In the two largest markets, China and the US, a directive for automakers to reduce carbon emissions by roughly 30 per cent by 2020 means fuel efficiency will rise, limiting oil demand growth. Already in the US carmakers have cut emissions by a quarter over the past 15 years. Europe and Japan, which have minimal oil demand growth, have gone through much of this process.

Oil may have stopped falling only temporarily. It will require a great deal of demand to force prices back uphill.

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