Cooling the heat
Saudi Arabia widened discounts for November and December sales
By Centre for Global Energy Studies
Posted: 26 November 2007
 Send this article
 Print this article
A combination of surging supply and more pessimistic views of fourth-quarter oil demand from international agencies have combined to take some of the immediate heat out of oil markets.
 While benchmark oil prices have retreated from the $100 per barrel threshold they threatened to break in recent weeks, the oil market is likely to remain tight over the winter months, as the additional oil works its way slowly through the supply chain.
Opec oil production increased by nearly 350,000 bpd in October, according to CGES estimates, even before the organisation’s latest output agreement came into force.
Iraq ’s oil production has risen with the resumption of exports from its northern fields and there are hopes that improved pipeline security will make these more sustainable than in the past.
Iraq has signed its first term contract for supplies of Kirkuk crude for more than three years, signaling increased confidence in the country’s ability to maintain oil flows to Ceyhan.
Saudi Arabia also took an important step for price, widening significantly the discounts against benchmark grades for US customers of all the Kingdom’s export streams for November lifting and increasing them further for December, when Arab Heavy will be sold fob Ras Tanura at a discount of $16.35/bbl to spot WTI. The increased discounts ought to make heavier Saudi Arabian grades attractive to refiners with simple hydroskimming capacity, something that the CGES has been urging for many months.
There is also a sense that perception about the strength of oil demand has begun to shift, with stubbornly high forecasts of demand growth in 4Q07 from the IEA being slashed in their November Monthly Oil Market Report.
Preliminary data from the US Department of Energy also indicates that total US oil demand over the last four weeks was 0.7% down on the same period last year, while year to-date demand is up by just 0.1%.
The CGES has long been more pessimistic than others about the robustness of oil demand growth in the face of high prices and we expect further downward revisions to oil consumption forecasts for the first quarter of next year, unless the Northern Hemisphere winter is particularly severe.
The shift in the balance of supply and demand may have prompted oil prices to retreat from the all-time highs reached recently, but the market will remain tight until the increased production begins to show up in higher crude oil arrivals in the major oil-consuming regions and on-land commercial inventories start to rise.
Signs that the global economy may be heading for a slowdown are undermining longer-term forecasts of oil demand growth, suggesting that prices could fall sharply next year. The path of oil prices over the coming months will be greatly influenced by how Opec reacts to any downward correction. Saudi Arabia ’s decision to reduce the relative price of its oil suggests that the Kingdom accepts the need for the oil price to come down, but other, more hawkish, members of Opec hold very different views. |
