Crude oil prices are climbing again. $100/bbl is not impossible, if current geo-political concerns continue. And today’s tightly balanced market could persist to 2010. The Energy Institute ran an interesting business breakfast yesterday with Leo Drollas, chief economist of the Centre for Global Energy Studies (CGES). CGES are usually well-informed, being chaired by former Saudi Oil Minister, Sheikh Yamani.

Two main conclusions stood out:

1. Spare oil production capacity has recently increased, but is mostly in the hands of OPEC. Yet CGES believe that OPEC’s attempts to ‘micro-manage’ oil markets ‘often backfire’. This seems to be happening now. In Q3 last year, an abnormally high 1.2 million barrels per day (mbd) stock-build led to OPEC production cutbacks in Q4 06/Q1 07. But this reduction coincided with an unusually cold N American winter. The result? Today’s very tight stock position.

2. OPEC is scheduled to increase its capacity by 3.5 mbd between now and 2010. But there are doubts about whether this can really be achieved. Nigeria should bring on 0.6 mbd, for example – but has already ‘lost’ a similar amount due to the problems in the Niger delta. Iraq is due to add 0.2 mbd, but is losing more than this due to the turmoil in the country. Iran should also add 0.2 mbd – but can they afford the required $2bn?

The key to the oil price story is Saudi Arabia (KSA). Over the past year, CGES estimate that KSA oil production has reduced by 1 mbd to around 8.6 mbd. It is now increasing, but only slowly. CGES also estimate that the KSA needs an OPEC ‘basket price’ of at least $55/bbl to meet their current financial objectives. In addition, they will need to invest $5bn to increase capacity by 2010. KSA concerns about President Bush’s proposed ramp-up of US biofuel production perhaps need to be taken more seriously – will they spend this money, if they feel the capacity is not needed?

So where will the price go over the next 6 months? The official CGES forecast is for it to slip back in Q4, but then average around $75/bbl in H1 2008. This appears reasonable, with one caveat.

Drollas also showed CGES’ research on the effect of speculative activity on oil prices. They have identified a new investor class of commodity investors, hedge funds and financial players, who operate in the futures markets. 13 barrels of ‘paper’ crude are now traded for every barrel of physical crude. The amounts involved have grown from $8 billion in 2000 to $130 billion at the 2006 peak. In terms of trading performance, these investors tend not to drive the price bandwagon, but simply follow the trend up or down.

CGES now see these funds starting to increase their investments again. In the right circumstances, this must mean there is at least a 25% chance that prices will overshoot on the upside, if the trend really gathers momentum early next year. $100/bbl Brent is not impossible in this scenario.

PREVIOUS POST

4 risks to the world economy

03/07/2007

The latest report from the ‘central bankers’ bank’ provides an...

Learn more
NEXT POST

ICI and Akzo

06/07/2007

ICI has experience of fighting off unwelcome acquisitions. And Akzo may find its...

Learn more
More posts
Global chemical industry – key trends for success in today’s New Normal
02/08/2020

The chemical industry is the best leading indicator for the global economy. On Friday, I had the pri...

Read
Oil prices signal potential end to the V-shaped recovery myth
26/07/2020

Oil prices have moved into another ‘flag shape’ – which previously provided critic...

Read
Bankruptcies now the key risk as hopes for V-shaped recovery disappear
19/07/2020

Governments, financial markets and central banks all originally assumed the Covid-19 pandemic would ...

Read
Merkel warns of need to prepare for No Deal Brexit
05/07/2020

Most people missed the fact that last Tuesday was the last possible date to delay the UK’s exi...

Read
Oil prices start to reconnect with coal and gas
21/06/2020

Oil prices are finally starting to reconnect with other fossil fuel prices, as the chart shows.  It...

Read
World moves from Denial to Anger, as the Paradigm of Loss moves forward
07/06/2020

I have been warning about the Covid-19 risk since early February, and in April suggested here that: ...

Read
The New Normal for global industry
31/05/2020

The global chemical industry is the third largest sector in the world behind agriculture and energy,...

Read
Debt, deflation, demographics and Brexit set to challenge London house prices
17/05/2020

London property websites haven’t used the word “reduced” for many years. But it...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more