Oil prices to set new record
OPEC urged to increase output
By Centre for Global Energy Studies
Posted: 30 July 2007
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Crude oil prices are setting new records, surpassing the levels reached last August, with the price of the OPEC Reference Basket now more than 50% higher than it was at its recent low point just six months ago.
OPEC continues to lay the blame for the dramatic run-up in oil prices on geopolitics and refinery bottlenecks, a view not shared by the CGES.
In our opinion, the world is short of crude oil and OPEC needs to relax its output restraints immediately if it really wants to ensure a balanced market with oil prices around $60/bbl, which seems to be the Organisation’s new target.
OPEC is quite simply not producing enough oil. The Organisation cut production in the face of a glut (mostly of fuel oil) that put downward pressure on prices at the end of last summer, but the excess has worked its way through the system and OPEC’s production is now well below the call on the Organisation’s oil.
Without more OPEC oil prices will continue to rise in the coming months.
Geopolitical concerns have much less impact on oil prices now than in the recent past. The Iranian government is adopting a more conciliatory approach towards the IAEA, reducing for now the threat of a disruption to its oil supplies and damage to Iraq ’s oil infrastructure has been greatly reduced, with just six reported attacks on oil pipelines in the first five months of 2007, compared with 23 during the same period last year.
Only in Nigeria is political unrest a serious threat to oil production, but even there the situation appears to have stabilised, with shut-in production remaining around 750,000 bpd.
Some market commentators argue that oil demand growth remains strong, despite high prices, suggesting that runaway demand is still driving the market, a position that is bolstered by the IEA’s 3% demand growth forecast for 4Q07.
Again, this is not a view shared by the CGES. Oil demand growth has actually been very weak in recent years, considering the strength of global economic growth.
The CGES expects global oil demand growth in 2007 to be little better than last year, at around 1% for the year as a whole, hardly what one would call robust growth.
OPEC seems to fear a repeat of last year’s fourth-quarter price slide. Much of its concern appears to be based on a wildly optimistic view of the growth in non-OPEC oil production.
This year’s surge in non-OPEC output has already happened, driven by Russia and Azerbaijan , and OPEC’s forecast of almost 51 mbpd of non-OPEC supply in
4Q07 now appears about 1 mbpd too high. It is OPEC’s member-countries who need to make up the shortfall.
In oil-consuming countries, political sentiment is echoing what was last felt during the late 1970s, with forecasts of very high oil prices and no end in sight. At that time, high prices ultimately led to oil’s loss of the power generation sector to alternative fuels (gas and nuclear).
Now, we are starting to see political encouragement of alternatives to oil in the transportation sector, signaling perhaps the start of real competition for oil’s last secure market. |
