RIYADH, Sept 3: Where the oil prices are heading to? Katrina, once again exposed the vulnerability of crude markets and how precarious the demand-supply balance is currently. The markets are not in a position to bear any hiccups, it once again underlined.
With oil prices finally breaching the $70 psychological barrier, even a $100 a barrel price does not seem to be ‘far fetched’. The Goldman Sach’s ‘super spike’ report which found limited support when it was first appeared in March this year, and which projected prices to go up to $105 a barrel is now starting to gain currency.
Oil fraternity is slowly getting prepared for a sustained rally in the crude markets. For various -– accountable and unaccountable reasons — the crude price curve has been pushed up considerably. The goal post is constantly being shifted.
The August Monthly Oil Report of the London-based Centre for Global Energy Studies released on the August 22 says: “Unless both upstream and downstream capacity constraints ease, global economic growth slows dramatically, or tensions in oil-producing countries ease, there is little prospect of oil prices falling far either this year or next.”
CGES indeed has reasons for this outlook. Rising global oil demand is continuing to put pressure on the industry’s ability to supply enough oil. As we move towards the Northern Hemisphere winter — when traditionally oil consumption stays on the higher side — Opec will need to keep production above 30 million bpd to keep with the call on its production.
Further, the outlook for incremental non-Opec supply in 2005 has also deteriorated, with Russian production -– previously the engine of non-Opec growth -– stagnating in the first half, the CGES report emphasized. The Russian output recovery has shuddered to halt amid high taxes and uncertainty, with the Russian ministry of economy expecting an increase of just 0.2 million bpd in 2006.
Opec has, in the meantime, been adding to its capacity albeit slowly. Commissioning of new fields in Iran, Nigeria and North Africa is providing some sort of relief. Then the Opec kingpin Saudi Arabia is also investing in projects which should boost its capacity to 11.3 million bpd by the end of 2006, says the report.
Saudi Aramco has already initiated the tendering process for its Khurais expansion project. The Khurais increment programme aims to add 1.2 million bpd of Arabian Light capacity by 2009. This is one of the several projects currently being undertaken by Saudi Aramco to raise its crude capacity to at least 12.5 million bpd by 2010. Other projects include the phase II expansion of the onshore Shaybah oilfield -– bordering Abu Dhabi -– which will add about 300,000 bpd of extra light crude and the development of the Nuayyim oilfields aimed at producing an additional 100,000 bpd.
Crude prices will hit their highest level in autumn this year, if the market variables continue to affect the prices in absence of any oversupply by the Opec and non-Opec members, a senior Iranian official also predicted last week.
National Iranian Oil Company (NIOC) for International Affairs deputy head Hojjatollah Ghanimfard forecasts that the market will witness 1.2-1.5 million bpd increase in demand in autumn compared to summer, exerting additional pressure on already strained prices.
In the meantime, Wall Street giants Goldman Sachs and Merrill Lynch have also revised upwards their predictions for the price of oil. Goldman Sachs expects that a barrel of US light crude will still cost close to $60 at the end of the decade. Even in the shorter run, Goldman Sachs predicts the prices to hover around $68 a barrel by the end of the next year.
While Merrill’s global energy team also raised its forecast for long-term US crude prices by 40 per cent, it sees a more manageable price of $42 a barrel by 2009.
US commodities guru Jim Rogers told Reuters that oil will prices will soar upwards to $100 a barrel.
“I don’t know about the next quarter or even next year...but it will go to over $100 a barrel (ultimately),” he said.
Although the latest price spike was triggered by storm worries in the Gulf of Mexico and a bigger-than-expected drop in American supplies of petrol, analysts agree that increasing global demand is the principal price driver. The prices spiked after the United States reported a drop in petrol stocks and China said its crude imports spiked in July. The markets were further strained by the storms affecting production in the Gulf of Mexico.
America is showing no letup in its demand for oil, while the rapidly expanding Asian economies are importing ever-larger quantities to meet their demands of growth.
The International Energy Agency estimates that demand for oil will increase to nearly 84 million barrels a day by the end of this year and will reach almost 87 million barrels a day by the end of next year.
There are indeed credible people around who still believe that crude prices would soon stabilize somewhere around $40-$50 a barrel. However, most of the pundits are now increasingly resigned to the fact that oil prices in the immediate and the mid-term future are going to stay in the higher than normal range. The only divergence among these pundits is now on the level the prices are to attain in the foreseeable future and the time frame. A sort of agreement seems to be already there -– with some going to the extent of $ 100 a barrel -–not a matter of if but of when.
For developing countries like Pakistan, this presents a very grim fact of life. There is a possibility that this could stutter growth of its economy at this stage. India had earlier proposed to Opec a sort of preferential long-term oil pricing policy for the developing world.
Philippines president Gloria Arroyo is expected in Saudi Arabia next week, on her way to New York, so as to request Riyadh for preferential crude pricing for Manila, so as to ease the burden on its economy of the rising oil bill.
But with oil producers already faced with their own set of problems, the chances of them accepting anything of that sort seems very difficult. Hence economies like Pakistan will have to stand on its own crutches. Pakistani economy planners have a big task in hand.
