Crude-oil futures in New York jumped Thursday on the fear of violence in Nigeria and a forecast from the International Energy Agency of continuing tight world supplies. Also on Thursday, the OPEC oil cartel said it may slow production capacity investment if consuming countries reduce their oil demand through conservation and by increasingly turning to alternatives, such as biofuels.
Light, sweet crude for August delivery closed up $5.60 on Thursday, or 4.1%, higher at $141.65 a barrel on the New York Mercantile Exchange. The increase was the second-largest in dollar terms in Nymex history - the biggest dollar increase was $10.75 on June 6th.
On Friday, on Nymex, oil is trading at $141.72 up 7 cents and in London, Brent surged $5.83 to $142.41. on the ICE commodities exchange.
In New York, the front-month crude contract had remained above $135 a barrel for two days after Tuesday's fall, the biggest in dollar terms since 1991.
On Thursday, a Nigerian rebel group said it would end a cease-fire and target UK interests in the country, after British Prime Minister Gordon Brown said the UK would support the Nigerian government in its war against militants in the oil-rich Niger Delta.
The International Energy Agency (IEA), which is the energy adviser to 27 developed countries including Ireland, on Thursday slightly raised its forecast for global oil demand this year and said growth would continue in 2009 because of strong demand in developing countries.
Global demand for petroleum products such as gasoline, diesel and heating oil will grow by 1%, or 890,000 barrels a day, to 86.9 million barrels a day in 2008, the Paris-based IEA said in its monthly report. That's up slightly from the 0.9% increase the IEA forecast last month.
In 2009 global oil product demand will expand by 1% or 860,000 barrels to 87.7 million barrels a day, the IEA said.
"High oil prices contribute to a contraction in OECD oil product demand, offset by robust growth in developing economies," the IEA said.
OPEC Forecast
The OPEC - Organization for Petroleum Exporting Countries - oil cartel on Thursday launched its World Oil Outlook 2008 and warned that it may need to slow investment in its oilfields as consuming countries reduce their oil demand through conservation and by increasingly turning to alternatives, such as biofuels.
Abdalla Salem El-Badri, the group’s Secretary-General, said: “Why should we invest in spare capacity that will not be used? We see plenty of spare capacity until 2020.”
OPEC said new projects from outside the group could cut the need for the cartel’s oil to 31m b/d by 2012.
The cartel cut its demand forecasts for 2030, estimating that the world would need 113m b/d, 4m fewer barrels than it had previously predicted. The report cites the efficiency gains and demand erosion that come with high prices as their reason.
 |
| Source: IEA |
The IEA expects supply to remain tight in the medium term and industry analysts are not optimistic that non-OPEC producers, who pump 60% of the daily output, can fill the gap.
An oil industry leader in Russia, the world's second-biggest producer, has said that production peaked in 2007 and output in the North Sea and in Mexico is falling.
The OPEC report says that prices were very low throughout most of the 1980s and 1990s. This had a dramatic impact on the oil industry. It meant investments were scaled down; drastic cost-cutting strategies were put in place; R&D spending was reduced and, more importantly for the longer term, the oil industry no longer attracted the much needed skills from those just beginning their careers. Low oil prices were bad for the oil industry and oil producers, and in the longer term they were also bad for consumers. At the beginning of this century, when faced with above-trend global economic growth, the world was caught unprepared for the dramatic surge in energy demand. In addition to this, there were the hurricane-related supply disruptions in the US.
OPEC says, today there is no shortage of oil and OECD commercial oil stocks are at comfortable levels. Clearly, elements other than supply and demand fundamentals are at play. The first element is related to the fall in the value of the dollar in relation to other currencies. For example, it went from 1.3 dollars per euro in August 2007 to around $1.6 in June 2008. This represents a significant weakening in the value of the dollar.
 |
| Source: IEA |
Another element driving oil prices relates to the role of regulated oil futures and unregulated over-the-counter (OTC) exchanges. The trade in paper barrels has expanded dramatically in recent years. For example, the ratio of paper barrels traded on the NYMEX to the physical barrels actually supplied has exponentially increased over the last five years. In 2003, for each physical barrel, six paper barrels were traded; today, that ratio has risen to more than 18 barrels traded, three times as high. And these ratios are even higher if London and Singapore futures exchanges, the unregulated Atlanta-based Intercontinental Exchange, as well as OTC transactions, index trading and derivatives products are taken into account. Assets allocated to commodity index trading alone have risen from $13 billion at the end of 2003 to $260 billion by March 2008.
OPEC says many believe that the structural integrity of futures markets has been damaged by the various loopholes that effectively allow unlimited and undetected speculation, far beyond the limits of healthy liquidity-providing levels towards damaging price distorting ones. Oil and other commodities have become attractive financial assets for investors to diversify portfolios and increase returns, with the influx creating upward pressures on prices.
Many others believe that supply and demand issues are the predominant factors in the surge in oil prices.
Highlights of the IEA's July Report:
Crude oil futures fell back from their early-July $145/bbl peak, but remain high, supported by a meagre 2Q08 stockbuild, tight distillate markets and ongoing geopolitical risks. Refiners are paying record premiums for distillate-rich crudes in an effort to bolster yields; however, weak gasoline and fuel oil cracks are keeping refining margins low.
Non-OPEC supply is seen rising 640 kb/d to 50.6 mb/d in 2009, following a late-year increase in 2008, with Asia, the Caspian, Brazil, Canada and the US adding to supplies. In addition, NGLs from Saudi Arabia, Qatar, the UAE, Nigeria and Iran underpin the 810 kb/d expansion in OPEC gas liquids in 2009.
OPEC crude supply increased by 350 kb/d in June to 32.4 mb/d, as Saudi Arabian supply rose to 9.45 mb/d and exports from floating storage lifted Iranian supply to 3.8 mb/d. Although higher supply lowers effective OPEC spare capacity to 1.7 mb/d, increases from Saudi Arabia, Angola, Iraq and Nigeria lift overall capacity by around 1.0 mb/d by end-2008.
Global oil product demand is expected to grow by 1.1% or 860 kb/d to 87.7 mb/d in 2009, on a par with 890 kb/d growth in 2008. High oil prices contribute to a contraction in OECD oil product demand, offset by robust growth in developing economies. Strong non-OECD consumption also offsets downward revisions elsewhere, lifting 2008 demand by a modest 80 kb/d.
A counter-seasonal US crude stock draw restricted the May OECD total oil stockbuild to 23.9 mb, only half its usual gain. Preliminary June data suggest a total 2Q08 OECD stock change of around +100 kb/d, well below the five-year average 2Q build of 900 kb/d.
3Q08 global refinery throughput is revised down by 0.4 mb/d to 75.3 mb/d on weak OECD demand and poor margins. The addition of 2 mb/d of crude distillation capacity and significant investment in upgrading units elsewhere should keep gasoline markets well supplied and slightly ease middle distillate tightness during early 2009.
