When Petroleum and Mineral Resources Minister Ali Al-Naimi said to CNBC, “Where the prices are today between $40-$50, it will probably be with us (in the same band) throughout 2005,” he was reflecting the sentiments of the market. “I’m always reluctant to make a prediction as to what the price is but looking at fundamentals inventories, supply, demand and the worldwide desire for a stable oil market I believe it will be in this band,” he emphasized. He was simply echoing the fact that the era of cheap oil has apparently come to an end at least for the time being.

When the Norwegian oil minister visited Saudi Arabia last week, she also conceded that higher oil prices are here to stay. Al-Naimi also emphasized then too that oil prices were expected to stay at higher than previous level for some time to come. The issue of fair returns to producers apparently also came under discussion during the meeting of the two major players in the energy sector.

The market fundamentals have changed drastically. The oil industry is facing a major structural shift. Soaring demand, stagnating non-OPEC, non FSU supply and a lack of new production capacity among most of the OPEC members, are taking their toll.

At the same time as demand growth is being revised upward, non-OPEC output figures are being trimmed. The combined effects of Hurricane Ivan, strikes and bad weather in the North Sea, a fire in Alberta and the re-nationalization of Yuganskneftegas in Russia have been to reduce the non-OPEC supply by at least 0.5 million barrels per day from the levels expected over the winter. As a result more oil is needed from OPEC to balance supply and demand.

The London based Center for Global Energy Studies, founded by the former Saudi minister Sheikh Zaki Ahmad Yamani, says that the need for (more) OPEC oil will not end with winter. “Capacity limits are being tested throughout the oil supply chain. With more long-haul deliveries of oil, there are fewer idle tankers and the growing demand for light, sweet, low sulfur products, especially from China and India, is putting pressure on cracking and de-sulfurization (refining) capacity.” Heating oil supplies were already running nine percent below year ago levels, last week. US heating oil futures have consequently also surged, with the March contract up 74 points at a new three-month high of $1.4905 a gallon.

Refining bottlenecks have often been highlighted by Saudi Aramco too. In a recent speech before a Texas conference the Aramco CEO Abdullah Jumah rightfully said that in view of the bottlenecks exporting countries could build refineries near the export terminals. In this connection he also announced that Saudi Aramco planned building an export refinery in the Kingdom.

The weakening dollar also had its impact on the crude market, with the Eurozone countries finding them less affected by the rising crude prices.

Then the fact remains that although the world’s major private oil companies reported record profits in 2004, almost all of them saw falling levels of oil production and were unable to replace reserves through drilling. The companies chose to return billions of dollars to their shareholders, suggesting a lack of big new upstream projects available for investment.

While OPEC appears ready to do what ever is possible to control the price spiral, in the wake of the changing market fundamentals, there is not much that the oil cartel could do. There is not much spare capacity within the OPEC, perhaps with the sole exception of Saudi Arabia. Then even if the spare capacity is available, it is generally not the sought after sweet light type. With the refineries already running overtime, not many would be willing to process the heavy-sour crude that may be incrementally available. Hence the market dynamics in the global crude markets do not appear to be changing rapidly. And this is apparently what Naimi was referring to.