Little prospect of lower oil prices
By Centre for Global Energy Studies
Posted: 17 December 2007
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There is unlikely to be much seasonal cheer for oil consumers. Although oil production at last appears to be rising, oil prices are expected to remain high over the winter and into 2008, despite fears about the true state of the US economy.
Coordinated action by central banks, aimed at easing the global credit crisis and heading off a recession has been welcomed by politicians, but has so far left oil and stock markets unimpressed.
 Should global oil demand growth slow down dramatically and oil prices begin to fall, OPEC must avoid the temptation to cut output sharply in defense of prices, for this would simply worsen the situation and make the economic landing even harder for everyone.
This year OPEC deliberately kept the world short of oil in order to avoid a repeat of last year’s autumn price fall, a policy that has been extremely effective from the Organisation’s point of view.
As a result of OPEC’s supply restraint, global oil inventories are expected to fall by
425,000 bpd this year and it is difficult to see how this, combined with strongly rising prices, can be described as a market that is well supplied, as OPEC has repeatedly claimed.
More oil is, at last, on the way as the Organisation’s members have begun to raise output levels. The small volumes of incremental oil that crept onto the market over the summer moved eastwards, but the latest increases appear to be destined for Western markets, although refiners in the US will not want to take delivery before the year-end tax liabilities are calculated. As a result, US crude oil inventories are expected to remain on a downward trend until the end of the year, but should begin to rise thereafter.
The US Administration has chosen to allow the dollar to depreciate in value in order to prevent the economy from slipping into recession, but this is leading to higher inflation in the US and reducing the purchasing power of OPEC’s oil revenues, spurring the Organisation to seek ever-higher prices.
US Energy Secretary Sam Bodman called for OPEC to raise output to help reduce the oil price and alleviate inflationary pressure on the US economy. Although OPEC ignored the request, Saudi Arabia may be tempted to take heed, for a US recession could be extremely damaging to OPEC member-countries, particularly if it results in a slowdown in China as export orders begin to decrease.
In its latest Oil Market Report the International Energy Agency has again cut its forecast of oil demand growth for 2007, but has rather surprisingly boosted its incremental oil demand for 2008 to a truly astonishing 2.1 mbpd.
This is more than twice the increase of this year and last and comes in spite of concerns about the state of the economy of the world’s largest consumer and record high oil prices.
The upward revision is out of step with those of other forecasters such as the EIA (1.4 mbpd) and OPEC (1.3 mbpd) and is very far removed from the CGES’ own forecast of 0.63 mbpd.
Taken at face value, the IEA’s 2008 demand growth forecast suggests that much more OPEC oil will be needed next year just to keep oil prices at their already high level. |
