Global crude prices are treading unchartered waters — having almost tripled from around $30 in 2003. OPEC seems resigned to the emerging situation, saying it was doing all it could. Forces pushing up the prices show no sign of abetting. $90 is now very much in sight and the $100 a barrel era could be just around the corner.
Tight supplies, weakening dollar, geopolitical worries, storms, cold weather projections and strong global economic growth — all seem to be adding to the current woes of the market.
Tensions between Turkey and Kurdish rebels in northern Iraq are a cause for immediate concern. Adding fuel to the current fire was the OPEC report that non-OPEC production is also down by 110,000 bpd and that the global consumption is registering growth again.
Oil futures rose sharply earlier the week after the US government predicted a colder winter ahead lifting the crude demand projection for the fourth quarter. In a monthly report, the US Energy Information Administration (EIA) estimated that global demand for crude will be 1.8 million barrels a day higher in the fourth quarter than it was during the same period last year. The report followed a projection last week by the US National Oceanic and Atmospheric Administration that winter temperatures in the US will be 1.3 percent lower than last year, conceding though it would be 2.8 percent warmer than average.
A Platts presentation earlier this week also confirmed that investments in oil and gas sector is falling behind the requirement, making the demand-supply balance even tighter over the next few years.
The $100 a barrel era hence seems just round the corner. “The two arguments, the ability of technology to raise new supply and the ability of prices to limit demand, are falling quickly by the wayside,” said Jeffrey Rubin, an economist at CIBC World Markets, contributing to the possibility of $100 era.
“Gone are Big Oil’s smug assurances that their technical prowess will untap huge hitherto undiscovered reserves of cheap crude. What we hear instead through the voice of the US National Petroleum Council are warnings of depletion and steadily rising prices.” Rubin emphasized strong growth in China and other developing nations taking up any slack in demand from the wealthier nations. “Why haven’t soaring prices shackled demand? They actually have in some places like the carbon conscious economies of Western Europe,” he said.
“But such reductions have become a footnote to the world demand curve, which is no longer shaped by energy consumers in the (industrialized) economies, but by the seemingly insatiable appetite of newly empowered consumers in developing countries whose economies are industrializing at breakneck speeds.”
A CIBC report noted that China consumes more than double its daily production of 3.5 million barrels, while consumption at other fast-growing Asian nations — India, Pakistan, Malaysia and Thailand — is also going up fast.
Producers like Russia and China have failed to fill the gap and Iraq, once a major producer, has been slow to increase production, the report noted.
Ben Tsocanos, an analyst at Standard’s & Poor, said markets remain concerned about a political crisis in key oil producing region. “If there were a real political crisis, like in Iran or any supply disruption, the oil market turns vulnerable to disruption or fear of disruption,” he said. “So it is possible to hit $100 next year.”
Oil traders appear to have cast aside concerns that high prices will lead to a global recession. “It seems like the world is willing to pay more money for oil, it does not seem like it is slowing down growth,” Tsocanos said. “OPEC does not have really a lot of capacities.” Bart Melek at BMO Capital Markets said price pressures are not receding. “I think it is going be a very tight market,” he said.
Global consumption at major consumers also seem to be relatively unaffected by the skyrocketing crude market prices. In order to meet the escalating demand in China, Saudi Aramco had to increase its oil exports to China by at least 9 percent this year, officials were quoted as saying by Bloomberg.
Shipments to China may climb to more than 26 million metric tons of crude this year, Aramco officials said. Saudi Arabia has shipped almost 17 million tons of crude oil between January and August to China, an 8 percent increase from a year earlier, the latest customs data reveal. Oil exports to China from Saudi Arabia also went up by 7.6 percent last year to 23.87 million tons.
China plans to boost refining capacity by 25 percent in the five years to 2010, the government said last March. The nation’s state oil companies are building units capable of processing the comparatively cheaper, heavy crude, from the region with higher sulphur content, explaining the ever increasing shipments of crude to China from this part of the world.
Weakening dollar is an element in the current price mix.
Some in OPEC today seem inclined towards the $100 era. Most analysts till yet believed that OPEC was acting to preserve an official floor pricing of $80 a barrel. Is that in for some change now? Qatar’s Energy Minister Abdullah ibn Hamad Al-Attiyah in remarks said “If we take into account inflation from 1972 to the present day, the real and fair price for oil should be more than $100.” He said such a price was justified by rising inflation, a fall in purchasing power and the weakness of the dollar, which has dropped about 10 percent in value against the euro over the past year.
However, not every one seemed to agree. OPEC chief Abdalla Salem El-Badri said last month that the oil prices of (even) around $80 did not reflect fundamentals and were unlikely to last long at that level.
Although the clamor to drop the dollar peg seems to be growing in the Gulf, yet the central banks have refrained as yet. “Rising oil prices have been serving as a hedge against the decline of the dollar and its impact on exchange rate losses. From the (Gulf) governments’ point of view, there has not been any urgent compulsion to revalue currencies,” John Sfakianakis, chief economist at Saudi British Bank, said recently.
