Supply, not demand, is the problem – CERA
Posted: 01 May 2006
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Supply, not demand, is the primary current challenge to world oil markets, says the Cambridge Energy Research Associates (CERA).
In the firm’s latest World Oil Watch, James Burkhard, CERA’s Senior Director of Oil Market Analysis, identified the elements of a 2 million-plus barrels/day (bd) “aggregate disruption” in world supply.
 Iraq with 900,000 bd below prewar levels; Nigeria with 530,000 bd shut-in by insurgents; Venezuela with 400,000 bd below pre-2002-2003 strike levels; and U.S. Gulf of Mexico with 330,000 bd less than before Hurricanes Katrina and Rita.
In addition, smaller transitory losses add to the disruption.
The sharp increase in Asian consumption that drove the market in previous years is not a similar factor currently, according to CERA. “There’s still the feeling that Chinese oil demand is going through the roof,” said Burkhard. “But China’s 2004 increase of 16 percent dropped to 1.7 percent in 2005, and this year, we’re expecting about 6 percent increase – or about 400,000 b/d,” according to Burkhard.
CERAChairman Daniel Yergin added: “The world oil market is in the grip of a slow motion supply shock in which a $70 to $75/barrel price reflects an aggregate disruption of over two million barrels/day.”
“The market is so crisis-prone that it spikes on the ratcheting up of tension and rhetoric over Iran’s nuclear program or attacks and threats from insurgents in Nigeria,” Yergin said.
He said that compounding the effects of international events, the rapid switchover from MTBE to ethanol in the U.S. gasoline market is also adding to the price that motorists are paying for gasoline because the handling and logistics for the two blending components are so different.
This switch requires different kinds of suppliers, trucks and railway cars instead of pipelines, and blending at terminals instead of refineries. Moreover, this shift is coming at the same time that the U.S. refinery system, still scarred by last year’s hurricanes, is making the switch from winter to summer gasolines. The upward pressure on gasoline prices correlates with higher crude oil prices, especially for higher-grade crudes, Yergin said.
Outlook
CERA’s outlook through 2007 includes supply and demand increases, with continued refining constraints:
World oil demand to increase by 1.7 mbd in both 2006 and 2007—a 2.1 percent annual gain for both years.
Non-OPEC supply increases 860,000 barrels per day in 2006 and 1.4 mbd in 2007.
Refining constraints continue to support high prices for light, sweet crude.
Under these conditions, CERA estimates that OPEC spare production capacity will rise from about 1.9 mbd today to 2.4 mbd in 2007.
“Higher spare capacity can diminish market fears about supply availability, but this moderate increase will not eliminate concerns linked to potential or actual supply disruptions,” said Burkhard. “This means that fear of or actual disruptions are likely to continue to exert a significant, but somewhat diminished influence on the oil price through 2007.”
Declining Oil Intensity: Economic Impact?
“The continuing decline in the oil intensity of the global economy is a key reason that the world economy can better handle high prices today compared with the 1970s and early 1980s,” said Yergin. In 1980, according to CERA’s World Oil Watch, it took nearly $72 worth of crude oil to generate $1,000 of real global economic output. In 2006, CERA estimates that it takes little more than $41 worth of crude oil to generate the same amount of real economic output.
“This cost falls to less than $40 in 2007 if there is a moderate softening in crude prices, “said Burkhard. “But if prices move above $70 per barrel and remain there, demand growth will be weaker. While $50 oil did not seem to cut into economic growth, that does not mean a similar free ride for $70 or $80 oil. There is certainly growing concern around the world that current high prices will seep into inflation.”
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