Oil Prices To Remain Above $100 Without OPEC Action

BRAI ODION-ESENE | MARCH 2011 | SOURCE: iMarket News.com

The price of oil will average above $100 per barrel for all of 2011, especially without "coherent" action by OPEC to increase the supply of oil to the market where buyers "clearly" want more oil than is on offer, the Centre for Global Energy Studies said Monday.

Only weaker oil demand, driven down by slower global economic growth due to the Japan earthquake, could bring oil prices down, it said.

Oil Prices To Remain Above $100 Without OPEC Action

The London-based think-tank also slammed oil cartel OPEC, accusing some of its members of actually wanting higher oil prices, while it said others with the spare capacity to increase production appear to be doing very little, perhaps distracted by political unrest at -- or close to -- home.

In its Monthly Oil Market report, the London-based think-tank said its supply/demand balance suggests the world will need 30.3 million barrels per day from OPEC in the second quarter of this year, just to keep quarterly oil prices at around $110/bbl.

"Production in February was estimated at 29.85 million bpd and is now down at around 29 million bpd," the report said.

If oil supply from OPEC remains below demand the CGES warned, things could end up being worse in the oil market. "This is entirely possible if Saudi Arabia is slow to step up to the mark, while Nigeria, Iraq and Angola's output could also be affected, by political unrest in the case of the former two and technical problems at deepwater fields in the case of the latter."

Also, the report added, OPEC's members might become too distracted by the political events in the Middle East and North Africa to act coherently.

The CGES projects global oil demand to grow by 1.4 million bpd in 2011, up 1.6% over 2010. While it expects the higher price of oil to drag down demand in much of the developed world, the CGES said recent tragic events mean Japan will surely require additional supplies of both crude and oil products to replace any electricity lost as a result of shut in nuclear power plants and to fuel the colossal reconstruction effort required after such a disaster.

Outside the OECD, the CGES projects oil demand growth at 1.5 million bpd for the year, with the rate of growth slowing in the second half of the year as a result of the impact of tighter monetary policy in countries such as China.

"We believe this leaves the call on OPEC at a high level of 30.9 million bpd for 2011, assuming there is an increase in desired stocks as we expect," the report said.

However, "Given the Organization's current production rate of 29.8 million bpd and its previous form in reacting slowly when the market requires more oil, this is likely to be a tall order, especially if Libyan output is disrupted for a sustained period."

In the CGES Reference case, OPEC output falls short of this target, averaging 30.2 million bpd this year (+900,000 bpd year-on-year), with Saudi crude output inching closer to 10 million bpd over the next three months and Kuwait, the UAE and Iraq all producing a bit more oil.

The report said if OPEC's output rises by only 700,000 barrels per day, compared with 900,000 bpd in the Base case, and all the other variables are unchanged, then there is a stock draw this year rather than a stock build.

"Given that the oil market is already tight, this puts Dated Brent on a steep upward trajectory, with the price climbing from $104/bbl in 1Q11 to $123/bbl in 3Q11 and averaging $119/bbl in 2011," the CGES predicted.

The report was highly critical of OPEC member-nations, saying the "evident lack of urgency among them to act to bring oil prices down" is due to the fact that some face protests within their own borders, hence the willingness to allow prices to drift higher.

"The pursuit of ever-higher prices, though, risks a repeat of the collapse in oil demand and the concomitant fall in OPEC's own revenues that we saw in 2008," the CGES said.

At the time of writing WTI NYMEX was trading at $102.27, in a range of $101.66 to $103.35 on the day so far. According to OPEC, its daily basket price stood at $110.54 a barrel Friday, March 18, compared with $108.08 the previous day.

The CGES said despite assertions by OPEC that the market remains well supplied, "buyers clearly want more oil from OPEC than it is currently producing, yet those with spare capacity, who repeatedly assure the market that they can and will act to address any shortfall in supply, actually seem to be doing very little."

And focusing on key supplier Saudi Arabia, the CGES said it would not be surprising if the attention of the oil bellwether was not focused entirely on the oil market.

"Saudi Arabia clearly faces troubles much closer to home than North Africa," it said. "The protests in neighbouring Bahrain have already dragged in its troops, angering Shia dominated Iran across the Gulf."

According to the CGES, the only factor that would bring about lower prices, in its view, is weaker global demand growth.

"It is certainly possible, for example, to envisage that the disaster that has struck Japan may well lead to slower global economic growth as the country's exports dwindle over the next few months due to the extent of the damage and disrupted production," it said.

Afterall, it noted, many Japanese components are key ingredients of the global supply chain.

In this scenario, the CGES projected global oil demand would increase by 1.2 million bpd, compared with 1.4 million bpd in the Reference Case, and with oil supplies remaining unchanged Dated Brent declines from a high of $108 per barrel in the second quarter to $95/bbl by wQ4 of this year.

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