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Oil market forecasts... weighing the factors
Dennis Morrison
Wednesday, November 07, 2007
HAVING broken the US$90 mark for the first time just a fortnight ago, oil prices seem set to reach US$100 per barrel very soon. The fall in the value of the US dollar is one of the factors at work, along with uncertainties in the geo-political arena. For oil- rich developing countries these prices represent opportunities for accelerated development. The question is, "How long will this price boom last?"
Dennis Morrison
As I had indicated in an earlier article, while geo-political forces have fuelled the current volatility in international oil markets, price movements are underpinned by the fundamentals of supply and demand. The fact is that in the last decade or more, the increase in demand for oil has outstripped the growth in supply to the point where the reserve capacity in the global supply network is down to a very low level.
Part of the answer to the question about the sustainability of the price boom therefore rests on the prospects for expansion of supply in the coming period.
Higher prices for oil in the past few years have not only enriched oil-producing countries, but have boosted the profits of oil companies. Indeed, business reports have pointed to the exceptionally high profitability achieved by these companies in 2005 and 2006. ExxonMobil, for example, achieved the highest net profits ever reported by a US company in 2006. Spurred by high prices and record profits, oil companies have been aggressively expanding their production to make even bigger profits.
Consequently, investments in oil exploration have increased sharply with the number of active rigs in 2006 being the highest in over 20 years. And oil and gas drilling operations were at twice the 2002 level.
The stepped-up pace of business has now placed severe constraints on available manpower and equipment, which are affecting the costs of investment projects and their rate of implementation. The projections are, however, for new oil production capacity to increase substantially over the next five years.
The most optimistic forecasts suggest that in the 2006-2010 period, world oil production capacity could increase by 11.7 million barrels per day, of which about one-third, or 3.8 million barrels per day, could come from the OPEC countries. This additional capacity would result in a 14 per cent increase in the current level of world oil supply. It would significantly raise the reserve capacity level, for global oil demand over the same period is slated to expand by 8.1 million barrels per day.
Less optimistic forecasters anticipate that supply constraints will persist. They are placing higher downside risks on project delays and changes in fiscal and regulatory regimes affecting investment in oil exploration and new production. The changes made by Ecuador, Kazakhstan, Russia and Venezuela have received the greatest attention. But Alaska and Alberta, major oil-producing regions, have also made moves to extract more revenues that could dampen investment activity in their oil industries.
On balance, it would appear that the rate at which oil prices have increased in the last three years will not be sustained in the medium term, as new production capacity comes on stream.
So while oil has gone from less than US$50 per barrel four years ago to nearly US$100 today, it is highly unlikely that we will see prices well above US$100 for any sustained period, up to 2010. In the short term, however, when supply is expected to remain very tight, and in the face of tensions in the Middle East and in Asia Minor [Iran], the oil markets are likely to continue to exhibit a high level of volatility. That is unless the major economies succumb to the threat from the subprime-stricken financial sector. In such a case demand for oil would slacken, thereby releasing the pressure on prices.
Dennis Morrison
Wednesday, November 07, 2007
HAVING broken the US$90 mark for the first time just a fortnight ago, oil prices seem set to reach US$100 per barrel very soon. The fall in the value of the US dollar is one of the factors at work, along with uncertainties in the geo-political arena. For oil- rich developing countries these prices represent opportunities for accelerated development. The question is, "How long will this price boom last?"
Dennis MorrisonAs I had indicated in an earlier article, while geo-political forces have fuelled the current volatility in international oil markets, price movements are underpinned by the fundamentals of supply and demand. The fact is that in the last decade or more, the increase in demand for oil has outstripped the growth in supply to the point where the reserve capacity in the global supply network is down to a very low level.
Part of the answer to the question about the sustainability of the price boom therefore rests on the prospects for expansion of supply in the coming period.
Higher prices for oil in the past few years have not only enriched oil-producing countries, but have boosted the profits of oil companies. Indeed, business reports have pointed to the exceptionally high profitability achieved by these companies in 2005 and 2006. ExxonMobil, for example, achieved the highest net profits ever reported by a US company in 2006. Spurred by high prices and record profits, oil companies have been aggressively expanding their production to make even bigger profits.
Consequently, investments in oil exploration have increased sharply with the number of active rigs in 2006 being the highest in over 20 years. And oil and gas drilling operations were at twice the 2002 level.
The stepped-up pace of business has now placed severe constraints on available manpower and equipment, which are affecting the costs of investment projects and their rate of implementation. The projections are, however, for new oil production capacity to increase substantially over the next five years.
The most optimistic forecasts suggest that in the 2006-2010 period, world oil production capacity could increase by 11.7 million barrels per day, of which about one-third, or 3.8 million barrels per day, could come from the OPEC countries. This additional capacity would result in a 14 per cent increase in the current level of world oil supply. It would significantly raise the reserve capacity level, for global oil demand over the same period is slated to expand by 8.1 million barrels per day.
Less optimistic forecasters anticipate that supply constraints will persist. They are placing higher downside risks on project delays and changes in fiscal and regulatory regimes affecting investment in oil exploration and new production. The changes made by Ecuador, Kazakhstan, Russia and Venezuela have received the greatest attention. But Alaska and Alberta, major oil-producing regions, have also made moves to extract more revenues that could dampen investment activity in their oil industries.
On balance, it would appear that the rate at which oil prices have increased in the last three years will not be sustained in the medium term, as new production capacity comes on stream.
So while oil has gone from less than US$50 per barrel four years ago to nearly US$100 today, it is highly unlikely that we will see prices well above US$100 for any sustained period, up to 2010. In the short term, however, when supply is expected to remain very tight, and in the face of tensions in the Middle East and in Asia Minor [Iran], the oil markets are likely to continue to exhibit a high level of volatility. That is unless the major economies succumb to the threat from the subprime-stricken financial sector. In such a case demand for oil would slacken, thereby releasing the pressure on prices.