Here are two European insights on current developments in the price of oil. One is from Barclays and the other by Chris Skrebowski who maintains a list of global oil fields under development (megaprojects) and edits Petroleum Review. The reports are in close agreement.
The Oil and Gas Journal (2/11/08) reported that Barclays Capital, the investment banking arm of Barclays Bank, PLC has issued a report on the broad outlines of the current market for oil. Their conclusion is that, “The rise in prices has been less about anything happening in a dynamic fashion to push prices up …[than] The failure of of rising prices to loosen global [supplies].” Demand is increasing steadily from China, Saudi Arabia, and India, in that order and is expected to continue that way.
Barclays expects demand in 2008 to grow by 1.7%, up from 1.2% in 2007. They do not believe economic weakness in the U.S. and possibly EU will be sufficient to dent the growth of the developing economies. “…almost half of global [oil demand] growth in 2007 came from a region [the Middle East and Russia, I presume] where the direct short-term linkages to the OECD…[are] weak.”
Skrebowski reinforces Barclays’s views by pointing to current inventory tightness. He says, “Between July 2007 and December 2007 OECD oil stocks went from the top of the five-year range to the bottom…Forward supply has slipped from 55 days to 51 days in just five months…in 4Q07 the stockdraw was running at 1.1 mn b.d according to the International Energy Agency [EIA]. If stocks are not rebuilt to more comfortable levels, price spikes and supply shortfalls become much more likely.”
He goes on to point out that OECD oil demand has been slowing steadily since 2005, but that OECD oil production has been slowing even faster. Thus, OECD demand for imports is increasing despite its reduced use of oil.
Skrebowski contrasts OECD attitudes toward oil and free markets with those of oil exporters who believe in subsidizing their domestic oil price so that consumers do not experience the economic motivations of the free market as seen in OECD countries. This is one reason for the rapid increase in domestic oil demand among oil exporting countries that is cutting into the availability of oil on the export markets. He sees little indication that this oil price subsidies will stop in the near term. Subsidies are also in place in high-growth countries that do not export oil, such as China.
“The conclusion is that we now have an oil world in which the impact of high oil prices is only really felt in the OECD countries where demand is already falling.”
Skrebowski’s sense that oil inventories are tight in the West is interesting from a couple of viewpoints. First, Matt Simmons and Charlie Maxwell seem to confirm Skrebowski’s view. They have been saying that inventory reductions during the past few years is one way that oil demand and supply have been balanced.
Secondly, OPEC has been justifying the maintenance of stable production levels by saying for some time that “markets are well supplied,” referring to OEDC markets. Well, that does not seem to be quite the case according to Screbowski, Simmons and Maxwell.
All of this makes one wonder if the OPEC countries are actually in a position to increase their exports or if they are covering up an inability to increase supplies by saying that action is not needed. Now that OPEC has adjourned until next September, it may be well into the Fall until we find out more about the truth of this matter.
