JEDDAH, 8 August 2006 — Oil prices have reached record highs of $75.76/b and increased by almost 16.9 percent so far in 2006. The main factors in this tremendous increase are the under investment in this sector, structural changes on supply and demand sides and refining issues that are pushing prices higher, Global Investment House (Global) said in a report yesterday.
Geopolitical tensions with the recent Israeli attacks on Lebanon, uncertainty of oil production from Iran and supply disruption from West Africa are the other contributing factors for high prices. World oil demand is estimated to grow by 1.38 mb/d or 1.66 percent to 84.6 mb/d in 2006. We expect oil prices to range between $55-60/b during 2006, another excellent year for GCC economies, it said.
According to OPEC, world oil demand in 2006 is estimated to grow by 1.38 mb/d or 1.66 percent to average 84.6 mb/d. World oil demand in 2007 is projected to average 85.9 mb/d, implying a rise of 1.3 mb/d or 1.5 percent over total 2006 consumption. The world economy looks healthy with a growth of 4.74 percent suggesting higher oil demand growth, however, unusually warm winter in the first quarter in North America diminished the positive impact of healthy economic growth, Global said.
High oil prices have also dampened oil demand growth, especially in some Asian countries, which have eased or removed oil product subsidies due to rising world market prices On a regional basis, China and the Middle East are expected to contribute most to the rise in demand with an estimated growth of 0.4 mb/d and 0.3 mb/d respectively. North America’s oil demand is also expected to grow by 0.2 mb/d, higher than the estimate for 2006.
The production of OPEC crude in 2006 is expected to average 29 mb/d. On a quarterly basis, the OPEC forecast shows that the demand for OPEC crude is expected at 28.6 mb/d in the third and 29 mb/d in the fourth quarter of 2006.
In 2007, the demand for OPEC crude is expected to drop to 28.3 mb/d, a decline of 0.7 mb/d compared to the previous year. On a quarterly basis, the demand on OPEC crude is seen to be 28 mb/d in the third and 28.6 in the fourth quarter of 2006.
Non-OPEC oil supply in 2006 is expected to average 51.4 mb/d, representing an increase of 1.2 mb/d over the previous year. In 2007, non-OPEC oil supply is expected to average 53.1 mb/d, representing an increase of 1.7 mb/d over 2006.
On a regional basis, a substantial increase is expected to come from the FSU region (mainly Caspian), followed by Africa, North America and Latin America. OECD Europe and Pacific are expected to show a modest increase, while Other Asia and the Middle East are expected to remain broadly flat.
It is worth noting that the strong production growth in the above regions should result in stiff competition in the Mediterranean and the Atlantic Basin.
Looking at bio-fuels, total production is expected to increase 60,000-100,000 b/d, of which 80 percent may end up as transport fuel. OPEC Natural Gas Liquids (NGL) plus non-conventional oils is expected to rise 0.2 mb/d to 4.5 mb/d in 2007, following a similar increase in 2006.
In June, OPEC crude production averaged 29.6 mb/d, representing an increase of 0.1 mb/d from last month with Iraq oil production aggregating to 2 mb/d.
OPEC net oil export revenues for 2005 are now estimated at around $473bn, up 43 percent from 2004 levels. For 2006 and 2007, OPEC net oil export revenues are forecasted at $522 billion and $495 billion, respectively.
Several major world events during 2004 and 2005 affected world oil markets and contributed to the spike in OPEC oil export revenues. These included:
• Low OECD oil inventories held in commercial storage, particularly in terms of “days forward consumption”
• Uncertainty about the flow of Iraqi oil exports in the face of the high level of turmoil within the country
• Damage inflicted on U.S. Gulf Coast and offshore oil installations last fall following a series of destructive hurricanes (Ivan, Katrina, Rita, etc.)
• An unexpectedly strong surge in world oil demand, particularly in China
• Capacity constraints (production, refining, and transportation)
In July, prices began to move sharply upward further as the US driving season kicked into high swing and demand expectations improved. Around mid July, OPEC Reference Basket recorded an all time high of $70.38/b due to escalating international tensions in the Middle East.
The increase in oil prices is attributed to the fast deterioration in the security situation in Lebanon. Also Iran continued to be a factor in pushing prices higher, against a background of talk of US military options to resolve the international dispute over Iran’s alleged nuclear program while Nigeria continued to experience shut-in capacity which threats the global oil supply.
Moreover, political risk in Latin American supplier states may add to the “fear factor” premium on prices, with both Bolivia and Ecuador having nationalized oil firms. WTI and Brent oil prices hit record highs of $76.8/b and $75.76/b respectively both around mid July.
GCC countries are focusing on increasing their oil production level in order to have a sufficient spare capacity in the case of demand increase or supply disruptions by some of the oil producing countries. Balancing the demand-supply oil market is a key challenges in the energy market the oil exporting countries so as to maintain oil prices in a reasonable range.
“We believe that expanding oil production requires opening up the energy sector to foreign companies, to benefit from their technical expertise and advanced tools in the field to enhance the exploration processes in both upstream and downstream projects. GCC governments are considering allowing foreign participation in their hydrocarbon recourses,” Global said.
