OPEC could not have done more. With limits on the additional supply the organization could provide to the world, the OPEC ministers meeting in Isfahan agreed to increase their official output ceiling by two percent as suggested by Saudi Arabia. Interestingly, the proposal also had the tacit support of Iran, which generally is regarded as hawkish on the issue of global crude pricing. Official output ceiling was thus raised to 27.5 million bpd, with an option to raise it further by 500, 000 bpd in second quarter, should the price stay high.
The Isfahan meeting came at a time of acute diplomatic tension with the United States over Iran’s nuclear program. Further as most producers are producing close to full capacity, many analysts worry that any disruption in supplies, either through war or accident, could send prices surging to $80 a barrel or more.
As per available projections, the OPEC’s Economic Commission Board (ECB) has pegged global demand growth at 1.9 million bpd, nearly 200,000 bpd above the secretariat’s assessment last month. On the other hand, the International Energy Agency (IEA), the energy watchdog of the industrialized world has just revised its estimated oil demand growth by 290,000 barrels per day to 1.81 million bpd in 2005, taking the global consumption projection to 84.3 million bpd. Through this revision, the IEA has revised its global demand growth projection by 500,000 bpd over the last three months. World oil demand grew exceptionally last year at 2.73 million bpd - the fastest in almost a generation.
The IEA estimates that the call on OPEC’s oil would go up by 400,000 bpd to 27.4 million bpd for the second quarter of the year. The full year call on OPEC oil was also raised by the IEA by 200,000 bpd to 28.6 million bpd. On the other hand the IEA forecast for the non-OPEC supply was also raised by 90,000 bpd to 51 million bpd - a 925,000 bpd rise from 2004.
As per the figures available, the robust demand has helped pull down commercial OECD stocks by 3 million barrels in January to 2.57 billion, keeping forward demand cover steady at 51 days.
Steep fall on dollar, the currency in which oil is traded, is also impacting the global energy markets considerably and it was also weighing heavily on the minds of the oil ministers meeting in Isfahan. The fall in dollar value has spurred funds to switch money out of foreign exchange markets into markets and into commodities such as energy and metals.
Crude prices in US have averaged $48.51 so far this year, up from last year’s recorded high of $41.48. The latest leg of seven-year price boom has lifted price from the cyclical low of $14.38 a barrel on average in 1998.
PFC Energy, a Washington-based energy consultant, said in a report last week, “It is clearer by the day that the oil complex is facing intense bullish pressures from a rash of factors: Strong demand, low excess supply capacity and economic and political forces that are redoubling interest in commodity investments. These forces are going to create further turbulence in the oil system.” PFC forecast that prices would average $51.50 a barrel this year and might rise above $60 a barrel.
