OIL-producing Arab countries intend to boost their output from the current 32.2 per cent of the world oil market to between 38 and 40 per cent by 2010, the Organization of Arab Petroleum Exporting Countries (OAPEC) has said. In its July 2005 editorial, OAPEC said plans must take into account the forecast rise in world demand for oil in this and subsequent years.

Opec’s latest estimates put world oil demand in 2005 at 83.9 million b/d, while the US Energy Information Administration puts it at 84.7 million b/d, rising to 86.7 million b/d in 2006, of which 60 per cent will be met by heavy crude. The rise in demand is expected to continue in coming years owing to several factors. The IMF predicts a 4.3 per cent growth in the world economy this year, despite fears of financial imbalance and inflationary trends.  Against this backdrop of developments in the world energy market, oil consumers and companies are turning their attention once again to the Arab region and Iran to meet their growing oil requirements, the monthly said.

This region possesses 71 per cent of the world’s proven oil reserves (786 billion barrels) and 46.5 per cent of the world’s natural gas reserves (79.7 trillion cubic meters). These massive reserve means the region is well-placed to raise its oil production capacity and utilize its surplus production capacity to calm market jitters. Saudi Arabia stands at the forefront, since it alone possesses 1.5 million b/d of surplus production capacity and could raise its production in future to between 12.5 million and 15 million b/d. Moreover, other Arab oil producers are planning to boost their production, which will raise their combined share of the oil market from 32.2 per cent at present to at least 38-40 per cent by 2010.

A Saudi-Aramco study estimates that investments of at least $421 billion will be needed to achieve this goal through the building of huge energy projects in the Middle East in coming years. By country, the investments required are $130 billion in Saudi Arabia, $95 billion in the UAE, $80 billion in Iran, $46 billion in Qatar, $35 billion in Kuwait, $15 billion in Iraq, and $10 billion each in Bahrain and Oman. Moreover, investments running into tens of billions of dollars will be needed to develop energy projects in Egypt, Libya, and Algeria. Oil prices have been skyrocketing over the past few weeks, increasing close to 45 per cent in the past three months to an alarmingly record high of $67 a barrel. 

Gasoline prices in certain states have already breached $3 a gallon.  It seemed as if it was only yesterday (or less than one year ago) that the traders were claiming $40 would the highest that oil prices could rally. 

Now in retrospect, in the minds of many of those same traders, $40 seems to be the lowest that we could see oil prices fall to once again. The sharp surge in energy prices has nearly everyone scratching their heads about where oil prices may be headed next and what currency pair they could trade to profit from that view.   Some oil traders are calling for $80 a barrel while more aggressive ones are setting their sights on $100.  Yet, in every scenario there are skeptics who also have valid arguments and in this case, oil skeptics are calling the rally a speculative bubble that will burst sooner or later. However for the actual majority that is banking on higher oil prices, trading currencies instead of oil may be more profitable endeavour due to the unique ability to earn not only capital appreciation, but also interest income, something futures contracts cannot offer.

The rise in oil has made headlines across the globe for months now.  Strong demand from China and India, the lack of ability by Saudi Arabia (and other Opec countries) to increase oil production as well as weather related supply shocks have fuelled the continual rise in crude oil prices.  High oil prices act as a tax for consumers by slowing down consumer spending, which eventually takes a bite out of growth. 

Currencies of countries that are net oil importers on the other hand face increasingly higher costs whenever energy prices rise. So taking a look at this from a net oil exporter/importer perspective, the currency pair that should be impacted the most by changes in energy prices is the Canadian Dollar and the Japanese Yen.

Several factors are contributing to the expectation of continued high crude oil prices. First, worldwide petroleum demand growth is projected to remain robust during 2005 and 2006, although not as strong as in 2004. Worldwide oil demand growth is expected to average about 1.8 million barrels per day between 2004 and 2006, a 2.1-per cent annual average increase compared with 3.2 per cent in 2004. This represents a downward revision from the previous Outlook’s annual growth rate of 2.5 per cent in 2005 and 2006.

One reason for the lower demand growth projection is the re-assessment of Chinese demand growth in 2005 in response to recent data for the first half of 2005. Chinese oil demand growth, estimated at almost 1 million barrels per day in 2004, is projected to grow more slowly at an annual average of 0.5 million barrels per day in 2005 and 2006. This is down slightly from an average of 0.6 million barrels per day for 2005 and 2006 in the previous forecast.

Second, production growth in countries outside of the Organization of Petroleum Exporting Countries (OPEC) is not expected to accommodate incremental worldwide demand growth. Non-OPEC supply is projected to grow by an annual average of 0.7 million barrels per day during 2005 and 2006, below the annual average growth rate seen in the 2002 through 2004 period.

Third, worldwide spare production capacity is at its lowest level in three decades; in practice, only Saudi Arabia has any spare crude oil production capacity available, and the Saudis would need to steeply discount their heavy oil in order to market it effectively.

Gold