Commodities | Aug 25 2006
By Chris Shaw
Despite high stockpiles and few supply problems the oil price rose by about 4% in July to an average of US$74.37 per barrel for West Texas intermediate, thanks in large part to ongoing tensions in the Middle East.
In its August "Oil Monthly" update National Australia Bank notes these tensions should continue to support the oil price in the medium-term, particularly as the market is likely to remain tight thanks to ongoing increases in Asian consumption and some issues regarding supply increases.
The main issue from the supply side is where additional capacity is likely to come from, as while the International Energy Agency (IEA) remains of the view non-OPEC supply should increase particularly as Russia lifts its output, others including the bank are not so sure.
On IEA estimates Russian production should grow by 2.6% annually to a total of 10.8m barrels per day by 2010, while other producers such as Brazil and Angola should also lift output. But both the US Energy Information Administration and the bank suggest Russian output is unlikely to be significantly changed from current levels in coming years, the Administration pointing to ongoing nationalisation of the sector as limiting for new investment while the tax environment is not conducive to production growth.
If this more negative view proves correct it would mean OPEC would be responsible for increasing spare capacity from current levels of about 2.3m barrels per day to around 4.9m barrels, but again views diverge here as the bank sees limited potential for this when compared to IEA estimates.
On the other side of the coin, both the IEA and the US Energy Information Administration see Asian consumption increasing by about 2% annually through 2010, with China lifting its demand by about 5.5% to a total of 8.7m barrels daily and India increasing its demand by about 3.3% annually. As a result, global demand is forecasting to reach 91.7m barrels per day by 2010.
The result is the bank expects the market to remain reasonably tight for several years, so in the period 2008-2010 it is forecasting oil prices to range between US$50-US$65 per barrel. The risk to these estimates remains to the upside, the bank pointing out if producers cannot build in a larger production cushion in coming years there remains potential for supply shocks to push prices above current levels.
Only longer-term does the outlook improve, the bank estimating a long-term price of about US$45 is likely as ongoing higher prices should result in non-conventional production methods such as gas-to-liquids and oil sands to be developed.