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Tuesday, December 12, 2017

Oil above USD 70 per barrel – but why?

Oil is now at a record price of well above USD 70 per barrel, even though - according to the Saudi Oil Minister Ali Naimi at an informal meeting of ministers on the sidelines of the International Energy Forum on April 24 in Doha, Qatar - there is nobody asking for additional crude. "Today there is plenty of oil on the market," OPEC President Edmund Daukoru said, "It's refining constraints and a fear premium that is pushing up prices."  

The U. S. Energy Information Adminiatration’s (EIA) analysis points to three major factors that have caused the price of oil to go from USD 20 / 30 per barrel in 2000-2002 to over USD 70 per barrel in the last couple of weeks.  

·                     Strong global demand growth, especially in China and the U.S. After average annual growth of just under one million barrels per day (mbd) between 1991 and 2002 (under 0.9 mbd for 2000-2002), world oil demand grew by 1.5 mbd in 2003, 2.6 mbd in 2004, and at least 1.1 mbd day in 2005 and is, according to the EIA, set to grow 1.6 mbd in 2006 and 1.7 mbd in 2007.

·                     Limited surplus capacity, both upstream and downstream. On the upstream side, according to EIA estimates, surplus global oil production capacity, which was as high as 5.6 mbd in 2002, plummeted to 1.8 mbd in 2003, and has been around 1 mbd during most of 2004 to the present day. While EIA expects surplus crude oil production capacity to increase slightly in 2006, it is expected to remain well below historical levels. Upstream surplus capacity does not appear likely to improve in 2007. The situation is similar downstream, where global refinery utilisation has increased from an annual average of 85% in 2002 to 90% in 2005. Global downstream capacity is expected to continue to grow in line with, or slower than, demand growth.

·                     Major weather and geopolitical risks that have highlighted the need for more surplus capacity, both upstream and downstream. However, because there is very limited surplus capacity, concerns about potential or existing supply problems in Nigeria, Iran, Iraq, Venezuela and elsewhere, as well as the threat of more hurricane damage this summer, have exacerbated price increases related to weather and geopolitical risks. The situation in Nigeria may continue for many months. Market concerns about a possible supply disruption from Iran are likely to remain throughout at least this year if not into next year, and concerns that we are in a cycle that could lead to strong hurricane seasons for years to come are not likely to fade away quickly. 

If the EIA is correct in its analysis that these are the major factors driving oil price, then it is logical to assume that oil prices will stay at high levels until current concerns are eased in one or more of these areas.  

Trade

Monthly VLCC spot fixtures

 

2001

2002

2003

2004

2005

J-A 06*

AG - West

25

24

31

34

25

22

AG - East

54

45

57

64

60

60

AG - RS

3

4

2

3

3

2

Others

35

31

32

32

29

30

Total

117

104

123

133

117

114

Source: Clarkson *2006 until endApril

We also see that the number of VLCC fixtures is lower than in both 2005 and 2004, despite U.S. crude oil production being almost half-a-million barrels lower than at the same time in 2005. U.S. crude oil stocks are 6% higher than at the same time in 2005 - and 15% higher than the average for the last three years. U.S. strategic stocks were drawn down in connection with hurricanes Katrina and Rita but are still 2% higher than last year and 7% higher than the average for the last three years. 

Chinese oil demand has been somewhat weaker than expected, but surging vehicle sales and robust economic growth suggest that demand should strengthen. Changes in the taxation of cars to penalise big cars, and the increase in the retail price of diesel and gasoline may, however, dampen the demand increase. But the rise in domestic refinery crude runs and improved availability of products could counterbalance the effect of the price increase. 

Contact: Erik Ranheim