LONDON, 12 August 2005 — Non-OPEC nations are failing to deliver as much oil as expected this year, despite record high crude prices, leaving already stretched OPEC to fill the supply void, the International Energy Agency said yesterday. The IEA, adviser on energy to 26 industrialized nations, cut its projection for non-OPEC supply growth by 205,000 barrels per days (bpd) to 675,000 barrels per day (bpd). Non-OPEC producers such as Russia and Norway are set to pump an average 50.8 million bpd on the 83.7 million bpd world market this year, the Paris-based agency said in its monthly report.
“Until the desire to hold more stocks is sated or the conditions that cause that are changed, the market will be looking for more supply and it will be looking to OPEC,” said Lawrence Eagles, head of the IEA’s oil market division. Slower growth in non-OPEC supplies this year - caused mainly by production snags in the North Sea and the US Gulf - looks skimpy when set against the 1.1 million bpd of new oil that was added to markets last year.
Some analysts say the IEA’s non-OPEC supply forecast is still too optimistic. “Although today’s IEA report is the most bullish one for some time ... we remain highly skeptical of its projection of a massive increase in non-OPEC supply over the second half of this year (a rise of 1.2 million bpd from Q2-Q4),” said Barclays Capital in a report.
“The flow of recent news (including worsening performance in North Sea oil output and further declines in Russian output growth) just does not support this kind of increase.” The IEA sees the picture on non-OPEC supplies brightening in 2006, with growth rebounding by 1.25 million bpd to 52 million bpd. But that projection is also revised down by 150,000 bpd from last month’s report.
With non-OPEC offering meager extra supplies, OPEC may need to turn up the taps. The responsibility in that case would lie solely with top world oil exporter Saudi Arabia, the only cartel member with significant spare capacity. The IEA reckons Riyadh holds 1 million to 1.5 million bpd of medium to heavy sour crude in reserve. But refiners struggling to churn out light transport fuels are shunning the Saudi oil.
The energy watchdog raised its requirement on OPEC crude for the fourth quarter, the seasonal peak in demand, by 300,000 bpd to 29.2 million bpd. OPEC already exceeded that level in July, having pumped 29.6 million bpd, said the IEA. “Stocks have built rapidly in the first half of 2005, despite $60 oil, but clearly, the market verdict remains that more inventories are needed until investment responses catch up and demand patterns are clearer.” Downward adjustments to non-OPEC supply growth in 2006 also raised the call for OPEC oil by 200,000 bpd to 28.3 million bpd.
OPEC efforts to stabilize markets by boosting supplies were applauded, but its slow investment in new production capacity drew criticism. “Moves to put in place a more comfortable spare capacity cushion ... seem to have slowed considerably in the past few years, recent Saudi expansions notwithstanding,” said the IEA.
Global oil demand was revised down by 150,000 bpd in 2005 and 120,000 bpd in 2006, but demand growth remains largely unchanged. Weaker Chinese apparent demand is expected to be partly offset by a modest adjustment to US data. “The net effect, slashing the demand baseline, implies a supply-demand balance considerably less tight than the one we are all living through,” said Deborah White, senior energy analyst at SG Commodities. World oil demand growth forecasts for this year and next were bumped up to a respective 1.6 million bpd (up 20,000 bpd) and 1.78 million bpd (30,000 bpd).
The IEA also reported that the Kremlin appears to be reasserting state control over national resources, and taxation favors the export of oil products over production: these two factors have blown a chill wind over oil investment in Russia. The IEA summarized in its August report the “impressions” to emerge from a recent visit by its officials to Moscow to meet representatives of the government, oil companies and analysts.
One piece of information to emerge was that “up to 380,000 (oil) wells are idle in Russia”. One of the causes was said to be “an insensitive tax regime”. The IEA reported: “After the laissez-faire period of the past decade and the rise of the oligarchs, the Kremlin is seen as re-establishing state control over national resources. This covers all phases from licensing terms through production to exports.
“Control over domestic and near-abroad energy infrastructure is seen as a key national interest. Consequently, new foreign investment in Russian oil could be limited to a small number of larger operators willing to take minority stakes in large projects.” The IEA revised downward its estimate for Russian oil production this year by 35,000 barrels per day to an average of 9.5 million barrels per day. This lower base, together with potential weakness of investment in developing oil resources by key producers, would also undermine output in 2006.
