Opec urged to raise output
Oil prices driven by more than just geopolitics and refining bottlenecks, says CGES
Posted: 30 April 2007
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OPEC appears to have successfully averted the risk of a heavy fall in oil prices by means of its production cut over the winter.
It now has to face up to the challenge of avoiding a repeat of last year’s price surge during the summer months by raising output in line with demand from refiners.
Last year’s output agreements, which have resulted in a reduction of more than 1.5 mbpd in production by the eleven members of OPEC excluding Angola since last August, succeeded in putting a floor under oil prices during an unusually mild winter, but they have now outlived their purpose and have tipped the oil market from over-supply to shortage.
Global oil demand growth has slowed in response to high oil prices and global economic growth might well weaken. While the world appears to have weathered last year’s price spike, inflationary pressures are beginning to mount in oil-consuming countries, leading to interest rate rises and a general economic tightening.
A second oil price spike over the coming summer could turn out to be more damaging than the last one.
US refineries are beginning to come out of turnaround and runs are expected to rise sharply over the coming weeks as they attempt to replenish gasoline and diesel stocks ahead of the summer driving season.
Following changes to US gasoline specifications, MTBE has been replaced as an additive by ethanol, but a smaller volume of ethanol is blended into gasoline than the MTBE it has replaced, leading to a net loss of around 2% of the gasoline pool, which must be made up just to maintain the level of supply to consumers.
Without more crude oil being made available, a key area of oil demand growth risks being choked off by rising prices.
OPEC’s claims that oil prices have been driven upwards by a combination of geopolitical tensions and downstream bottlenecks should not be used as an excuse for doing nothing. During times of heightened tension refiners want to hold higher stocks for precautionary reasons, particularly if spare oil production capacity is limited, and will bid up prices if the oil they want is not readily available.
A shortage of spare downstream capacity means that product stocks need to be built up ahead of demand, requiring an adequate amount of oil for processing. Last year, heavy crude oil had to compete as a feedstock for upgrading capacity with a glut of fuel oil that emerged as users switched to cheaper gas.
The market has now rebalanced itself to accommodate this change and
it is unlikely to be repeated.
OPEC’s belief that the market is well supplied appears to reflect its overly optimistic view of non-OPEC supply, both in terms of absolute level and year-on-year growth. It sees the world needing 30.3 mbpd of its oil to keep stocks unchanged, whereas we believe it needs to produce 30.7 mbpd to achieve the same result.
This difference could create, or avoid, a repeat of last year’s damaging price spike. The outcome is firmly in OPEC’s hands
- Centre for Global Energy Studies, Monthly Oil Report
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