Oil prices' new dynamic: too much oil, too little demand?

Oil prices could fall over the next five years as supply grows and demand languishes, a new report forecasts. Expanding production from North America and shift in demand to Asia behind new dynamic for oil prices.

Oil prices started the week on a down note Monday as traders focused on tepid economic signals in China.

Benchmark oil prices fell in London as Brent crude traded below $114 a barrel. In late morning trading in the US, oil prices on the New York Mercantile Exchange were down below $91.

The daily ups and downs of the oil market hint at a much bigger picture. The world of energy, as we know it, is beginning to look a little topsy-turvy. And the effect on oil prices could be beneficial for consumers.

Start with demand. Ever since the Arab oil embargo of the early 1970s, oil has flowed from OPEC and other developing nations to the developed world, whose energy demands kept rising.

Granted, that's an oversimplified view. Nevertheless, the West's growing thirst for Middle East oil pushed prices up. Now, that dynamic is changing. The developed nations' demand for oil is slackening. Europe's in recession. The US is growing but only sluggishly. China is slowing.

Indeed, oil markets are keenly attuned to China's growth. Over the weekend, Beijing released trade data that suggested that the world's second-largest economy may be stabilizing but is not yet growing, which caused oil prices to fall Monday.

More broadly, oil demand from developing nations is catching up. As early as 2014, it should outstrip demand from the developed nations, according to a report released Friday from the International Energy Agency (IEA), an autonomous body based in Paris within the Organization for Economic Co-operation and Development.

Just as demand for oil is moving from the West to the East (and the southern hemisphere), supply is moving the other direction. Most of the growth in oil supplies is coming from North America, thanks to Canadian oil sands and US success with fracking, according to the IEA report.

Add in Iraq's production capacity, which is expected to enter a new growth phase, and the oil supply begins to look less dire. "These new supply sources are expected to more than offset decline rates and outages elsewhere as well as the continued impact of international sanctions of Iran," the IEA report forecasts.

It's easy to overstate this. North America's increase in production is quite small compared with what OPEC pumps out on a daily basis. That won't change. But on the margins, it's extremely useful. The combination of weak demand and growing supplies will mean OPEC's spare capacity for oil production will grow to 'more comfortable levels" in the next five years, the IEA forecasts.

That's a comforting thought. And it suggests a dynamic one doesn't hear very often: Barring a new crisis in the Middle East or a sudden economic upturn, there could be too much oil chasing too little demand.

The effect: A downward trend in oil prices over the next few years?