AMSTERDAM (ResourceInvestor.com) -- The continuing price rally currently witnessed by crude oil has not yet resulted in lower demand forecasts. Forecasts by the International Energy Agency, OPEC and the EIA statistical arm of the U.S. Department of Energy that demand will decrease during Q2 and Q3 2006 - due to the end of winter and price constraints for consumers - has again been proven wrong.
In its monthly oil report OMR March 2006, the IEA stated that global oil demand growth is revised down from 1.78 million barrels per day (bpd) to 1.49 million bpd for 2006 due to persistently high oil product prices and increasing evidence of demand weakness in Southeast Asia. Even though this is a lower growth than expected; it still means that there is a growth recovery apparent in comparison to 1.02 million bpd in 2005, with both China and North America driving the rebound.
Asian demand, based largely on continuing economic growth in China and India, in combination with a re-emergence of Japanese demand, has been behind most of the current price developments. How far the latter is true still needs to be assessed, as geo-strategic developments (Iran, Iraq, Venezuela) and production disruptions in Nigeria can also be blamed.
Analysts expect that ongoing pressure on Iran will result in higher crude oil prices, as the Bush administration seems to be assessing further military options. The last days, American newspapers have reported that the Bush Administration is assessing the possibilities of strategic military options, such as the use of Bunker Busters or even Tactical Nuclear Weapons.
American government officials have refuted the claims, but the oil market still reacted vehemently, resulting in a price rally to $69.62 per barrel Brent or $68.74 WTI. The rally is expected to continue if no success is booked in the Iranian crisis or regarding the instability of Nigeria’s largest oil producing region.
Iran has been ruling most analysis lately, based on the threats made by the Tehran government that they could use the oil weapon (boycott), substitute the dollar denomination of oil contracts by a euro denomination or block the outlets of the Persian Gulf if international sanctions are applied. Arab countries have been trying to cool the market, stating that they don’t expect Iran to implement an oil boycott, but with no real effects. But in the case that this becomes a reality, several Arab OPEC countries, such as Saudi Arabia, have stated that they could demand if Iranian supplies are blocked.
It can still be argued that Iran and Iraq will not have a major negative effect on the real market fundamentals if things really go wrong. At present, most crude oil settings and fundamentals have been adjusted to incorporate a potential Iranian fall out. Current crude oil price levels already have a war-premium of more than $15-$18 per barrel.
A further increase of oil prices due to Iran will be only temporary as it will not affect most economies directly. Main markets to be hit by an Iranian oil boycott will not be the West, but Iran’s currently main supporters, China, India and even Japan.
Analysts should be keeping a closer eye on the developments in the Gulf of Guinea, West Africa. A possible doomsday scenario could be the disintegration of Nigeria, which is currently battling growing instability and militancy in the Niger Delta.
Not only are militants in the Niger Delta a source of concern, growing ethnic and religious tension throughout the country could lead to a total stand-still. The Nigerian government has already put into place several military contingency plans to counter a possible military confrontation with the different militant groups in the Delta region.
Reports have also been published indicating that the latter militant groups have changed overall tactics the last days. International operators in Nigeria have stated that the militants have increased their operations against offshore deepwater projects. If targeted, this could result in a total standstill of the Nigerian oil and gas production, which would take around 2.5-2.8 million bpd out of the constellation.
The fact that Nigeria has become one of the main oil exporters to the U.S. and several European markets could be a main issue of concern. To counter a potential gap in supply of 2.5 million bpd in a market of constraint would be impossible. No other third party supply will be able to counter this, resulting in exponentially high crude oil price increases.
Military analysts also have warned for the fact that more heavy weapons are currently trickling into the Niger Delta. Some reports have mentioned the fact that rocket systems, vessels and possibly armed patrol carriers (APC’s) have been acquired by the respective militant groups.
The fear of Western countries to be in the hands of the Arab Gulf producers has been taken away the last years. Diversification of oil and gas suppliers has been incorporated in most national energy strategies in the West. The role of OPEC as price setter is waning, as more non-OPEC production is coming on-stream.
Still, diversification for Western countries has been largely concentrated on the possible supply from the Gulf of Guinea (Nigeria, Angola) or FSU. Real diversification has not been implemented, as most often Arab supply has been substituted by Nigerian supply.
America’s current supply pallet shows a remarkable increase of Nigerian crude oil supply (1.1 million bpd, January 2006). The latter has resulted in an unexpected but dangerous reliance on one single source for supply. This time, sub-Saharan instability could be the main culprit behind high gasoline prices.
Western thirst for fuels will only increase the coming months, based on the coming American driving season and increased use of electricity (air-conditioning). Most of the latter supply is coming from regions in West Africa, North Africa and Latin America.
American and European consumers should become increasingly aware of the fact that disturbances in Africa are currently controlling their fuel prices, not inter-Arab conflicts.
