The global supply of oil in the first half of this year has been significantly lower than most analysts had forecast at the end of last year. In particular US commercial inventories have been very low. (In April US inventories were some 100 million barrels lower than during the same period in 1995).
However, many analysts thought oil prices would fall after the United Nations agreed in May to allow Iraq to sell $2bn of oil, (under the humanitarian oil sales programme). Despite expectations of increased supply, the latest brent oil price of $21.28/barrel is not much below recent highs. Why is this?
Partly it is due to disagreements between Iraq and the UN which have delayed the commencement of Iraqi exports. (Commentators now expect these exports to begin in September).
Sentiment has also changed towards the risk of over-supply. Commentators have become increasingly relaxed about the market's ability to absorb extra supply from Iraq without the oil price falling significantly.
However, OPEC officials still expect the oil price to drop later this year, and have warned members of the cartel to stick to production quotas in order to prevent such a fall. (Some OPEC countries are currently exceeding their official limits-high prices attract high production).
OPEC officials are probably right to worry. The prospect of growing OPEC and non-OPEC supply in the months ahead increase expectations of a fall in the oil price at the end of the year, even if political uncertainty keeps the price higher in the short-term.