As Demand for Oil Drops, Worries Rise for Debt-Heavy Companies

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Source: Getty Images

Source: Getty Images

Weak global oil demand is keeping a lid on prices, according to a new report from the International Energy Agency (IEA), and that’s bad news for companies carrying a lot of debt.

Oil demand for 2014 will be lower than previously expected, prompting the IEA to downgrade its forecast by 180,000 barrels per day (bpd) for the year. In the second quarter, global demand only increased at an annualized rate of 700,000 barrels per day, the slowest pace in over two years.

Flagging demand is helping to keep oil prices from spiking, which is fortunate, considering that violence in oil producing countries around the world is keeping a substantial portion of oil supplies offline. All told, around 4 percent of global oil supplies are offline because of conflict. But, according to the IEA, “Oil prices seem almost eerily calm in the face of mounting geopolitical risks spanning an unusually large swathe of the oil-producing world.”

Libya has been in a state of political crisis for over a year, which has kept most of its 1.6 million barrel-per-day capacity offline since the summer of 2013. Nigeria has experienced sabotage to key pipeline infrastructure, knocking some of its production offline. Iran has been under western sanctions since 2012, which have capped Iranian oil exports at 1 million bpd – about 1.5 million bpd lower than pre-2012. And Iraq, despite continuing crisis and chaos, has remarkably kept its output fairly steady.

The fact that prices have remained unusually stable over this period of global unrest is a result of weak global demand. Demand growth in the U.S. and Europe has been much softer than expected. OECD economies – a collection of 34 industrialized nations – saw oil demand shrink by more than 400,000 barrels per day in the second quarter.

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