AMSTERDAM () -- Unexpected troubles seem to be hitting the global oil market and pushing up crude oil prices; however, not from news surrounding the Middle East but from one of the minor supply regions, the North Sea. Norway's crude oil production has been at one of the lowest levels since 1994, another major setback to production in the North-West European region.
The main problem at present is the damage to a major gas export pipeline to Britain, after a ship's anchor damaged the pipeline. The unexpected production troubles in the North Sea only will only lead to higher prices in the coming weeks.
The damage has caused BP [NYSE:BP; LSE:BP], the operator, to close the Central Area Transmission System pipeline in July. The shut down of the total pipeline could cause a production cut of 170,000 bpd of North Sea oil and condensates, which is equal to 10% of the total production of the U.K.
The International Energy Agency (IEA) in Paris warned last week that Norway will be confronted by a larger-than-expected fall in Norwegian oil output. In 2007, the IEA expects that Norway will produce 2.51 million barrels per day (bpd) of oil and oil condensate in 2007, in comparison to the 2.6 million bpd predicted by the Norwegian Petroleum Directorate (NPD) in January of this year.
Analysts still are trying to assess the shocking downward adjustment by the NPD to 2.6 million bpd in stead of 3 million bpd. To make things worse, the IEA stated that Norwegian oil production will fall to 2.4 million barrels in 2008, 2.26 million in 2009 and 2.05 million in 2012.
The oil production of Norway is importance to the European Union (EU), as its oil is seen as stable, improving security of energy supply and countering price fluctuations. If Norway's production volumes now are under threat, further destabilization of the market could now be expected.
Global oil markets have shown direct effects of these developments, as crude oil prices (Brent) has jumped to an 11-month high of around US$78.40 per barrel. The main effect on global prices can only be shown after that first panic reactions have withered out.
Still, main stream analysis shows a growing tendency to expect higher crude oil prices in the coming months, largely supported by continuing political and economic tensions in major global production regions and a continuation of economic growth in main consumer regions, such as China, India, the E.U. and U.S.
To increase the current fluctuations of the oil market, the IEA has published a new report in which the energy watchdog expects that world oil demand will rise 1.8% in 2007. Total global demand will than reach a level of 86 million bpd. At the same time, global consumption (demand) for crude oil will increase by 2.5% to reach a level of 88.2 million bpd in 2008. No real assessments have been presented lately by international organizations, such as OPEC, IEA and others, regarding a possible supply crunch.
Taking into account the ongoing production constraints, low reserve replacement ratios and production increases, there are no real signs on the wall that demand growth will be countered by production increases. Small supply downfalls, such as now in the North Sea, already have a debilitating effect on price levels. Just imagine the effect of a shut down of 500,000-600,000 bpd supply, which is only a fraction of crude oil going through the Strait of Hormuz.
