With Europe as well as the US facing economic slowdown, Libya recommencing its oil production and International Energy Agency (IEA) slashing its global oil demand forecast, it may seem oil prices are bound to crash. However, prices have refused to ease. This means the world has come to acknowledge the oil industry’s supply-side risks.
As dark clouds gather over large western economies, the growth in crude oil demand is expected to slow down. IEA, which advises industrially-advanced countries (OECD nations) on energy-related issues, has slashed its demand forecast for 2011 to 0.9 million barrels per day (mbpd) in November 2011 from 1.4 mbpd in January 2011. The Libyan crisis has also got over recently and the country’s oil production has rebounded quickly in the past few weeks. From an average 75,000 barrels per day (bpd) in September, it rose to 350,000 bpd in October and 500,000 bpd by early November, with an expectation that it shall rise to 700,000 bpd by end-December.
These factors have not sufficed in taming international oil prices. In fact, the fall in October was quickly reversed and Brent crude oil is back at around $110 per barrel level.
The reason is that there are genuine supply-side concerns. The oil production from Organisation of Petroleum Exporting Countries (Opec) has consistently remained below what they should produce to fully meet global demand. The result is, there is a global drawdown in oil inventories. The 11.8 million-barrel fall in inventories of OECD nations in September took the inventory level below five-year average for a third consecutive month — something that has happened for the first time since 2004. Preliminary data suggested another 34 million barrel fall in stocks in October.
Even at the reduced demand estimate of 90.5 mbpd for 2012, Opec will need to ramp up its production from the current level to 30.4 mbpd to fully meet world demand. The upcoming meeting of Opec ministers on December 14 in Vienna is unlikely to take any decision on this issue due to pressure from price hawks — Iran and Venezuela.
In addition to these minor concerns, Iran’s nuclear ambitions pose a grave risk of sudden supply shocks. With its current 3.5 mbpd oil production and control over the Strait of Hormuz — the most important oil transit channel in the world — Iran holds the potential to cause significant supply disruption. Recently, the European Union expanded a sanctions blacklist against Iranian firms and individuals and warned it was considering extra measures against Iran’s financial and oil sectors. In verbal retaliation, Iranian authorities predicted doubling of oil prices in case of sanction on oil.
As the world acknowledges dangers posed by these potential challenges to global crude oil supply, oil prices refuse to bow low. A country like India, which heavily subsidises petroleum consumption of its people, will be at a greater risk to face any sudden spike in oil prices.
As dark clouds gather over large western economies, the growth in crude oil demand is expected to slow down. IEA, which advises industrially-advanced countries (OECD nations) on energy-related issues, has slashed its demand forecast for 2011 to 0.9 million barrels per day (mbpd) in November 2011 from 1.4 mbpd in January 2011. The Libyan crisis has also got over recently and the country’s oil production has rebounded quickly in the past few weeks. From an average 75,000 barrels per day (bpd) in September, it rose to 350,000 bpd in October and 500,000 bpd by early November, with an expectation that it shall rise to 700,000 bpd by end-December.
These factors have not sufficed in taming international oil prices. In fact, the fall in October was quickly reversed and Brent crude oil is back at around $110 per barrel level.
The reason is that there are genuine supply-side concerns. The oil production from Organisation of Petroleum Exporting Countries (Opec) has consistently remained below what they should produce to fully meet global demand. The result is, there is a global drawdown in oil inventories. The 11.8 million-barrel fall in inventories of OECD nations in September took the inventory level below five-year average for a third consecutive month — something that has happened for the first time since 2004. Preliminary data suggested another 34 million barrel fall in stocks in October.
Even at the reduced demand estimate of 90.5 mbpd for 2012, Opec will need to ramp up its production from the current level to 30.4 mbpd to fully meet world demand. The upcoming meeting of Opec ministers on December 14 in Vienna is unlikely to take any decision on this issue due to pressure from price hawks — Iran and Venezuela.
In addition to these minor concerns, Iran’s nuclear ambitions pose a grave risk of sudden supply shocks. With its current 3.5 mbpd oil production and control over the Strait of Hormuz — the most important oil transit channel in the world — Iran holds the potential to cause significant supply disruption. Recently, the European Union expanded a sanctions blacklist against Iranian firms and individuals and warned it was considering extra measures against Iran’s financial and oil sectors. In verbal retaliation, Iranian authorities predicted doubling of oil prices in case of sanction on oil.
As the world acknowledges dangers posed by these potential challenges to global crude oil supply, oil prices refuse to bow low. A country like India, which heavily subsidises petroleum consumption of its people, will be at a greater risk to face any sudden spike in oil prices.
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