Oil Market Under Pressure, Supply Not Able to Counter Demand

AMERSTERDAM () -- The Organization of Petroleum Exporting Countries (OPEC) and Western consumers seem to be heading towards a conflict.

In recent weeks, statements made by both parties, OPEC and the International Energy Agency (IEA), the statistical arm of the Organisation for Economic Co-operation and Development (OECD), have shown increased tension based on growing concerns of consumers about the oil supply situation.

The oil cartel's secretary general, Abdullah Al Badri, stated that crude supply was sufficient for now and OPEC would not be considering any raise to its current oil production and export levels in order to bring high price levels down.

The main reason for the current position taken by OPEC is officially that the cartel is worried that growing support by the OECD countries for bio-fuels and alternative energy sources will mean lower demand for crude oil in the coming years.

In its assessment of the crude oil market, published in the June Monthly Oil Market Report, the group has indicated that it will not bow to consumer country pressure. Al Badri stated that "oil markets remain well supplied and market fundamentals do not require any additional supply from 'OPEC' at this time."

Total demand forecasted by OPEC for its own crude in 2007 is set at 30.56 million barrels per day (bpd), a slight increase in comparison to the 30.33 million bpd previously expected. The main reason, according to OPEC, is not increased worldwide demand but lower production output of non-member countries, such as Russia, Norway and Mexico.

International agencies reported that OPEC still keeps to its assessment that for 2007 world oil demand is expected to rise by 1.3 million bpd, or 1.5%, unchanged from May's report but a lower projection than other forecasters such as the International Energy Agency (IEA).

In a reaction given by the IEA, supported by several Western ministers of energy such as U.S. Secretary of Energy Bodman, the current position taken by OPEC has been refuted.

The IEA, as spokesman of the OECD countries, has urged OPEC to consider increased production levels in the coming months, as most analysts expect a supply crunch at the end of 2007. Markets have already shown increased worries about supply levels, pushing Brent crude oil price levels above the US$70 per barrel.

Some analysts expect this to go higher as violence in Gaza, increased instability in the Niger Delta, continuing nationalization in Venezuela and the position of Iran are worrying. At the same time, OPEC's quota policy seems more and more forced onto the cartel by its own lack of spare capacity issues.

Saudi Aramco's current state of upstream developments is still not fully understood. Based on growing research figures provided by independent analysts, it has been shown that current depletion of Saudi oil fields are increasingly above the normal 8% to be expected. Several authors have already shown that since beginning of 2006, current depletion is more likely between 10%-14%, which is very worrying.

Overall production is under threat, as the Saudis have been forced to push forward several of their major upstream projects, planned to come on-stream in 2008-2010.

Even with the additional production capacity, overall status is worse than before. It seems that OPEC's kingpin is no longer able to play its historical role of swing producer. At present, nominal production cannot be maintained, shown by Riyadh's willingness to keep to the quota and decrease its crude exports to Asia.

When taking into account that other OPEC producers are facing even harsher times than Saudi Arabia, such as Kuwait, Iran, Nigeria and Venezuela, future supplies are generally under threat.

The impact of OPEC volumes is still the main factor in oil and gas prices worldwide. Expectations that Russia or Central Asia could fill in some of the room left by OPEC producers are not based on rational figures but largely on dreams.

New volumes will have to come from either OPEC countries (including Iraq, Iran and Nigeria) or from producers such as Russia, Norway or Mexico. With the exception of Norway, the rest of non-OPEC producers have never been able to live up to expectations.

Increased resource nationalism and geopolitical considerations have largely constrained increased production worldwide.

Even if all new projects worldwide are on time, on schedule, within costs and reaching targeted production volumes, investors should not expect a dive in crude oil prices. Demand is still substantially outgrowing new supply, while geopolitical issues are even constraining all more

A still growing lack of investments, combined with the fact that most new projects are behind schedule or have been shelved for the foreseeable future, decreasing production volumes should not be taken for granted.

Based on the current situation, no solution is imminent for higher volumes overall and lower price settings. The market should try to adjust to normal price levels between US$60 and US$70 per barrel.

At the same time, investors should be warned that if real facts should emerge about the huge problem Saudi reserves are facing, price spikes of above US$120 per barrel will not be the dream come true for bankers only, it will be a normal fact of life.

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