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Analysts Predict World is Using More Oil than It is Producing

Posted on November 7, 2007 by LCT Staff - Also by this author - About the author

LONDON — BACK in 2005, in an apparent flight of fancy, analysts at Goldman Sachs predicted a “super-spike” in the oil price to $105 a barrel. On Wednesday October 31st, the prediction came as close as it ever has to fulfillment, when the price of West Texas Intermediate reached $94.74 during the New York day and breached $96 after hours. But the investment bank’s seers are no longer sure that it will hit their mark soon — the “downside risks” to the price, they had warned investors the day before, were “gaining momentum”.

The price increases of recent months have stemmed from a marked drop in stockpiles of oil, particularly in America. That indicates that the world is using more than it is producing. Inventories normally dip in summer; when drivers take to the road, pushing up demand for fuel, and in winter, when demand for heating oil surges. In autumn and spring, by contrast, stocks usually rise. But so far this year, there has been no sign of the typical seasonal increase — prompting oil traders to worry that when winter sets in, the world will be short of oil. The prospect that the American economy might grow faster than expected thanks to interest-rate cuts has also fueled concern.

When stocks are low, minor reductions in supply become significant. A recent jump in the price, for example, came after Mexico’s state-owned oil firm announced that it would close down some offshore fields because of bad weather — even though the lost output amounted to less than 1% of global production. Fears of a much graver disruption of supplies, due to brewing political tensions in the Middle East, have also helped to push up the price.

In theory, new supplies should soon be coming on-stream. The Organization of the Petroleum Exporting Countries (OPEC) has agreed to raise its output slightly this month. But it also dismisses oil traders’ anxieties about shortages, insisting that current supplies are adequate. Non-OPEC suppliers, meanwhile, have plans to tap several new fields in the coming months. But on the whole, they are struggling to increase their output, owing to shortages of engineers and equipment, and to the concomitant rise in development costs. Both BP and Shell, for example, reported recently that they produced less oil in the third quarter of this year than they did in the same period the year before.

A price this high should also temper demand for oil. Motorists’ thirst for fuel does indeed seem to be faltering in rich countries. But as Francisco Blanch of Merrill Lynch notes, most of the incremental demand for oil comes from China, India and the Middle East, where the prices of petrol and diesel are subsidized or capped, leaving drivers with little incentive to cut back. Until the governments concerned start making consumers pay the market price, appetite for oil is likely to remain strong. There are signs of this — on Wednesday the Chinese government recently raised the price of fuel for the first time this year.

The likeliest scenario is that a gradual increase in supply and a slight mellowing of demand will eventually bring some relief. Goldman Sachs, for one, is predicting a price of $80 a barrel by April next year. But between now and then, its analysts warn, that spike may yet get sharper.

SOURCE: The Economist

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