Host of factors — reduced OPEC output, cold weather in the northern hemisphere, slower than expected non-OPEC production growth and drop in inventories — aided by the increasing confusion on a possible confrontation Iran on the nuclear issue, has contributed to the firming up of the oil market prices lately — from the lows of below $50 a barrel to around $58 mark at the moment.
The Monthly Oil Report (MOR) from the prestigious London-based Center for Global Energy Studies (CGES), says the OPEC 11, excluding Angola “have cut their aggregate oil production by nearly 1.5 million barrels per day (bpd) from the last year’s peak level of almost 30 million bpd. Some have intentionally cut their production in order to help shore up prices, while others, like Iran, Iraq and Nigeria, have seen their output reduced by natural decline or civil unrest.” As oil prices went even below the $50 mark, only a few weeks back, many in the industry began clamoring for more OPEC cuts. The CGES report however looked at the issue the other way.
Concurring with the Saudi Oil Minister Ali Al-Naimi, the CGES said: “OPEC’s current level of production, estimated at slightly less than 30.1 million bpd in January, is below the expected call on its oil. Unless OPEC production is permitted to rise in the coming months, oil prices could once again set off in an upward direction as refiners chase scarce barrels to meet summer demand for transport fuels in North America,” the authoritative report warned.
And ever increasing noises on the Iran seem to be confounding the markets further. The US has deployed an array of sophisticated strike force of destroyers, cruisers and submarines in the Gulf. All this is basically aimed at deterring the Iranian Navy from hostile acts in an area vital to oil shipments.
Iran, for its part, carried on with air and naval exercise, and announced testing missile capable of sinking large ships. In November, the Iranian Navy released pictures of its supply of mines that it says could be used to deny access to the Gulf for ships it considers “invaders.” Adding to the volatility is thus the prospect of such a clash. Forty percent of crude passes in tankers through the Strait of Hormuz, a 40-mile-wide pinch point at the southern edge of the 600-mile-long Gulf, and the energy world can hardly sustain a prolonged interruption.
On the other side, also weighing in on the market psyche is the projection about slower than expected growth of the US economy, reducing the expected demand from the world’s largest economy. This is trying to pull the market prices down, too. OPEC is currently projecting higher than expected growth in the US and other major global economies.
In its monthly report, OPEC has maintained the 1.5 percent growth in the world oil demand in 2007. It also expects the call on its crude to average about 30.25 million bpd in 2007 — down 150,000 bpd from its 2006 estimates.
The International Energy Agency (IEA), the Paris-based OECD energy watchdog has also raised its 2007 world oil demand estimates. The IEA in its monthly report said: “Global oil product demand is raised by 111,000 barrels per day (bpd) in 2006 to 84.5 million bpd and by 273,000 bpd in 2007 to 86.0 million bpd following revisions to China.” However, interesting is the fact that for the first time since 1985, oil demand in the 30 industrialized countries of the Organization for Economic Cooperation and Development had shown a significant drop, the report added. This was probably a reaction to high prices, but the drop did not imply a change in the longer-term trend, the report emphasized.
The IEA underlined that “in non-OECD (demand) has been robust” and that “non-OECD oil product consumption is forecast to grow by 3.6 percent and 3.2 percent in 2006 and 2007, respectively.” That was in large part due to “Chinese apparent demand, which is now seen to reach 7.1 million barrels per day in 2006 and 7.6 million barrels per day in 2007.”
On the supply front, the report said that “world oil supply grew by 175,000 bpd in January to 85.5 million bpd, with higher output in the FSU (former Soviet Union) and other non-OECD producers.” However, crude supply from OPEC fell by 180,000 bpd in January from December to 30.2 million bpd.
The IEA also revised the demand for OPEC oil to “30.6 million bpd for 2007 versus 30.3 million bpd in 2006 and remains above existing OPEC production,” said the IEA’s 52-page report.
Reporting on the supply side of the balance, the OECD energy arm emphasized that an output cut already decided by the OPEC “may be unnecessary.” Some though differ! Credible voices in the industry continue to suggest the market is oversupplied. The 10 OPEC members bound by the output agreements produced an average 26.95 million barrels per day in January, down 50,000 bpd from December’s 27 million bpd, but still well above the group’s November 2006 and February 2007 targets, a Platts survey showed Feb. 9.
Total OPEC output, including volumes from Iraq and new member Angola, averaged 30.11 million bpd in January, 1.21 million bpd higher than December’s 28.9 million bpd, the report said, emphasizing the OPEC-10 in January were still 650,000 bpd above their 26.3 million bpd target output level that came into effect on Nov. 1, 2006. This target was superseded on Feb. 1, 2007 by a new, lower output target of 25.8 million bpd.
But with the second quarter looming, traditionally the weakest demand quarter, John Kingston, Platts global director of oil cautions. “If OPEC wants to defend current prices near $60 it may prove difficult to do if the group’s production levels stay just under 27 million barrels per day. Most other projections see the market’s need for OPEC oil in the second quarter to be less than that.” Despite these contradictory claims and projections, one thing is certain; the peak $80 mark attained mid last year, is no where in sight at this moment and the markets would continue to be volatile in the short to medium term.