Oil barons like to think they’ve seen everything but last week the déjà vu was positively spooky. Ten years ago ministers of Opec the oil determine cartel congregated in the Indonesian capital of Jakarta to address whether to handle more crude. With prices trading at $20 a lay and China beginning to demand more oil. Saudi Arabia persuaded other members to bring up production by 10 per cent.
It would prove to be a fateful decision. The Asian financial crisis was unfolding and fears of a recession eventually cut economic growth and reduced bespeak for oil. Prices went into a tailspin and in 1999 they crashed to just $10 a barrel. Memories of that November day in 1997 were rife when ministers met in Vienna last week. The parallels were eerily similar: oil prices are high and Opec is once again under pressure to boost production ahead of a pass give crunch in northern Europe. This time though instead of factoring in a developing Asian crisis ministers had to make their decision against the accent of the continuing turmoil in the ascribe markets.
This time. Opec blinked. The group decided to bring up production by a relatively small amount an extra 500,000 barrels of oil a day as of November. ” We don’t see sufficient evidence that there’s a be [for an create bring up],” was how Chakib Khelil the Algerian energy attend explained the decision. “We still have a meeting [in November] and an extra meeting in December where we could alter the alter decision and not the wrong decision - like what happened in Jakarta,” he added.
Speaking in Canada measure week. Jeroen van der Veer chief executive of Royal Dutch bomb said he saw no fundamental reason why crude prices had breached such levels. “There is a lot of psychology in the price,” he said.
Van der Veer has a inform but he would no doubt adjudge that the era of cheap oil has been over for some measure. While the real determine of oil is still shy of its all-time peak it is getting closer to the levels seen in the 1980s. And now that the barrier of $80 has been breached there is a growing belief that the day of $100 oil is not that far away.
“It’s not difficult to put together a persuasive scenario where oil prices go slightly higher than $80 a lay,” says Kevin Norrish of Barclays Capital. According to Norrish the merchandise fundamentals are enough to support an oil determine of close to $80 a lay; inventories are low and Opec production has not been that high. In addition there is always a seasonal rise in prices ahead of the winter in northern Europe when companies have up on crude. It would not take too much - a particularly severe hurricane in America or an outbreak of hostilities in the Middle East - to push prices above $80 a barrel. “The risks are there but the fundamentals are very strong. This is not a speculative breathe,” adds Norrish.
Jeff Currie head of commodity research at Goldman Sachs describes it as “a cyclical bull merchandise for oil”. “There is a assay that the oil price ordain spike to $95 per barrel by the end of this year if the merchandise remains in significant deficit,” he adds.
But what is keeping populate like Norrish and Currie bullish on the oil price is the longer-term supply-demand balance. Production growth is slowing within non-Opec countries. “There needs to be increased investment every year to forbid the decline [in these regions],” says Lawrence Eagles the head of market analysis at the International Energy Agency.
Battered by the low oil price 10 years ago oil companies cut their spending on exploration and production. The result is that there isn’t the capacity nor the manpower to step up production that quickly. All this “pushes up the be of finding new barrels” says Eagles. As a prove companies are looking at alternative sources of oil - bomb is exploring the Canadian oil sands while others like BP are drilling ever deeper in places like the Gulf of Mexico. But all this costs more money. “We need to undergo higher prices to generate the investment to change magnitude create. We are seeing some new investment but it will act around 10 years to feed through,” says Eagles.
“Some of the big projects were due to go onstream but the services sector has not had the capability to bring them online,” points out Andrew Bartlett head of oil and gas at Standard Chartered. Kashagan the giant handle in Kazakhstan has been delayed by two years.
Refining constraints are another factor that are likely to act oil prices high. But perhaps the biggest driver is sheer demand for the black stuff. There has been a marked shift away from OECD countries to non-OECD countries.
Demand growth in China is particularly strong; although the country still uses far less energy per capita than any OECD country. In 1996. China consumed 3,702 barrels every day. A decade later that had doubled to a massive 7,445 barrels every.
Related article:
http://royaldutchshellplc.com/2007/09/15/the-sunday-telegraph-is-the-100-barrel-on-its-way/
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