JEDDAH, 25 February 2006 — Oil prices have once again breached the $60 a barrel and grew by almost 8 percent so far in 2006. This can be attributed to the market concerns over the supply disruption from Nigeria and the uncertainty of oil production from Iran. Yesterday, a Saudi oil refinery was subject to a failed bomb attack, which resulted in more concern about the supply of oil to the global market.
Oil prices increased more than $2 yesterday after news of a bomb attack at the huge Abqaiq oil facility in Saudi Arabia, which triggered worries about supply from the world’s top crude producer. US crude prices hit a high of $62.85 a barrel, up $2.31. London Brent also went up $1.66 at $62.21 a barrel.
The incident resulted in a minor fire which was immediately extinguished, and resulted in no changes in the production levels of oil or gas in Saudi Arabia.
Minister of Petroleum and Mineral Resources Ali Al-Naimi said that production will continue at full capacity and all export operations are to continue as usual.
According to a report by the Kuwait-based Global Investment House (Global), the oil prices will continue to remain high on the back of current scenarios in Nigeria and Iran, coupled with the maintenance at Murban in the UAE (United Arab Emirates) that cut production by 150,000 bpd. It also said the oil prices would remain in the vicinity of $50 a barrel this year, which implies another excellent year for GCC (Gulf Cooperation Council) economies.
According to OPEC, the average world oil demand will grow by 1.62 million bpd or 1.9 percent to average 84.8 million bpd for 2006. The improved economic conditions of the world led by consumption spending and capital additions will significantly increase the demand for oil and oil products in 2006.
Apart from higher consumption for automobiles and air travel, there has also been substantial increase in demand for residual fuel oil and gas oil for power generation in developing countries.
Demand growth expectations for the emerging markets continue to be better than the major developed markets. Asian markets and the Middle East are expected to see relatively high demand growth rates. However, it should be noted that the effect of the rising oil prices has had a palpable effect on the growth of many of the emerging Asian economies, which are highly import dependent for their oil needs. However, an impending price correction in commodity markets could undermine the growth expectations in these regions for 2006.
A distinct increase in OPEC oil production for 2004 continued in 2005. Supply pressures in the third quarter of 2005 were also due to events that took place in the Gulf of Mexico. Production increases within OPEC was led by Saudi Arabia, Kuwait, UAE and Libya. Further more, there was an improvement in the geopolitical scenarios in Nigeria and Venezuela compared to the previous year, allowing the production from these countries nudge higher.
However, the current situation in Iran and Nigeria will disrupt the supply balance, thus driving the oil prices further. As a result of this growing concerns, other countries in OPEC announced at the World Economic Forum that it will pump more oil to facilitate the market. This announcement from OPEC came as a relief to many, due to the growing concerns about the supply capacity. Moreover, OPEC also hopes to expand production capacity by at least 1.5 million bpd to 2 million bpd by the end of 2006 to ease fears about any shortage and keep the prices at around $50 a barrel through out this year.
Oil prices have climbed about 50 percent in 2005 due to strong demand, driven by economic growth and tight production capacity in OPEC and non-OPEC countries. Price volatility causes fluctuations of income and disrupts government planning in some countries, especially in the Middle East, who rely heavily on oil revenues. As for consumers, it adds uncertainty and threatens the stability of the economy.
The Global report said supply disruptions from Iran will have a major impact on the oil market, which will further bring instability for the world economy at a time when the world has got used to a price of $60 a barrel. Oil prices also will continue to remain in range bound, provided that these issues do not continue to swamp the market further.
High oil prices prevailing in the market will provide all the GCC economies with huge trade and current account surpluses. As a result of these huge surpluses, GCC governments can invest in order to reform their sectors and in turn fuel the private sector activity.
Although, the heavy dependence on oil in the GCC countries continues to remain a concern especially when considering the sustainability of this growth in the longer term.
The Global report added that the oil prices would remain high but not quite at the lofty levels that are currently prevailing in the market. The oil prices would remain in the vicinity of $50 a barrel this year, which implies another excellent year for GCC economies.