Oil prices to continue to rise over the summer unless OPEC relaxes its production restraint
By Centre for Global Energy Studies
Posted: 02 July 2007
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OPEC continues to believe that the world is well supplied with oil, while prices look set to record their biggest ever quarter-on-quarter increase of close to $11/bbl between 1Q07 and 2Q07.
This dramatic rise in oil prices would seem to suggest that the world is short of oil and ought to be providing a clear signal to OPEC that its members need to put more oil into the market.
However, the Organisation sees evidence elsewhere to support its argument that putting more crude into the market would not help to ease the situation. The CGES does not agree with OPEC’s assessment.
OPEC points to bottlenecks in the refining system, particularly in the US , and geopolitical tensions in the Middle East and Nigeria as the driving forces behind the recent surge in oil prices.
US crude oil inventory and refinery utilisation figures certainly appear to support
OPEC’s interpretation. Crude oil stocks in the US were at their highest level for more than nine years in mid-June, while refinery utilisation rates since the beginning of the year averaged 88%, failing to improve on those during the hurricane-affected first half of 2006 despite high margins.
However, the US is only the most visible part of the global oil system and the situation elsewhere paints a very different picture. Although technical problems have kept US refinery runs stubbornly low, global throughputs are up on last year, following increases in China , India and Russia .
Global oil inventories are not high either and are likely to show only most modest growth in 2Q07, a quarter when stocks would usually be expected to increase by around 1 mbpd, while a continuation of OPEC’s current output level into the third quarter would lead to a global stock draw of around 140,000 bpd during the second ‘stock-building’ quarter of the year.
Rising geopolitical tensions should also act as a signal for increasing production, not an excuse for inaction, if producers are sincere in their claims to seek a stable, well supplied market.
In times of rising tension refiners want to hold higher stocks to offset the risks of future supply disruptions. OPEC counters that it can make additional supplies available in the event of a disruption, but the overall time lags in a supply chain that involves taking and implementing a decision to raise output, positioning vessels to load and deliver the additional oil to market, moving that oil to refineries, processing it and delivering theproduct to consumers, can amount to as much as twelve weeks, whereas prices react immediately.
The US has not solved its gasoline supply problems and will be even more reliant on imports in the coming months, further extending the supply chain for US consumers. Asian refinery runs will rise over the summer as plants come out of turnaround, while US refiners will also be seeking to boost throughputs and European throughputs will remain high to supply the US market.
Global oil supply is little changed from last year, whereas refinery runs are up bynearly 1 mbpd. The world needs more oil if another price surge is to be avoided.
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