AMSTERDAM (ResourceInvestor.com) -- Crude oil prices could reach levels of US$100 per barrel or more if some of the latest production factors in the news become reality.
Not only has the Paris-based International Energy Agency (IEA), the energy watchdog of the Organisation for Economic Co-operation and Development (OECD) countries, warned in its latest medium-term oil market report that a market crunch is looming over around 2012, but some OPEC producers are breaking even more negative news. After a short analysis hype in the beginning of 2006, analysts have been forgetting to cover OPEC countries currently battling reserve issues.
Kuwait officials have stated that the government is studying a request by lawmakers to disclose the size of its oil reserves. Kuwait Minister of State for Cabinet Affairs, Faisal Al-Hajji, said the issue is still under review. Analysts have lingering doubts that the reserves could be sharply lower than official estimates. Most analysts’ focus will be on the overall Kuwaiti message in the coming days.
Oil analysts will be watching the Kuwaiti press to find out if the government will disclose information on oil reserves or if they will again decide to block independent assessments. Since January 2006, when Petroleum Intelligence Weekly (PIW) published a report stating that the internal records of Kuwait only show 48 billion barrels of reserves as opposed to official figures of 99 billion, the scale of reserves in OPEC's fifth largest producer remains sensitive.
If PIW's reserve figures are based on facts, the Kuwaiti differences will mean a 4% decrease on global proven oil reserves. The Kuwaiti case does not stand on its own, as energy analyst Matthew Simmons and others have been targeting Saudi oil reserves volumes for years.
Until now, Arab countries always have refused to discuss these issues, but some cracks are currently showing. Some Kuwaiti officials broke rank after former Oil Minister Sheikh Ali Al-Jarrah Al-Sabah, who resigned in late June, sparked some confusion by telling daily Al Jarida in May he could not deny the PIW estimates, while at the same time questioning how reserves were defined. Depending on definition, a wide range of estimates could be correct, he said.
These developments showed their ugly face at the same moment that the IEA issued a stark new warning to the public about future oil and gas production volumes. The energy agency has reported that straining gas output, leading to rising competition for gas substitutes such as fuel oil, will push up energy prices while crude oil supplies remain stretched beyond 2012.
Agency analysts stated that although fuel oil has historically been the substitute in the event of gas supply problems, the combination of declining spare oil capacity after 2010 and delayed new output will tighten fuel oil supplies, raising "serious concerns" for gas market security. Increased global competition and constrained export volumes will lead without doubt to higher price levels.
In addition to worrisome gas issues, crude oil is already under pressure from rising demand, especially from energy-intensive industrialization efforts taking place in Asia and the Middle East. In the Middle East, consumption has increased substantially to about three times higher than in average OECD countries.
The IEA has predicted that demand will increase on average by 2.2% per year between 2007 and 2012, which is substantially higher than the 2% before. Combined Asian and Middle Eastern demand is even expected to surpass OECD demand by the middle of the next decade. The IEA warned that the future oil market will be under extreme pressure, as the demand for crude oil in the Middle East and other OPEC countries will constrain possible gap filling for other regions.
Until now, growing global demand has largely come from non-OPEC regions that wanted to be filled by OPEC's increased production of oil and gas. This has now changed dramatically, as part of the new crude oil and gas production is used by local consumers.
In the coming years, the situation will only increase, as more and more OPEC countries, even Saudi Arabia, will have to battle lower production levels and increased oil field depletion rates. Some analysts have said that the current depletion rate of Saudi Aramco fields, the largest in the world, has increased from 8% in 2005 to around 12-14% in 2006. This would mean that new fields coming in production will only be there to cover lost production volumes elsewhere.
If these figures really materialize the coming months, crude oil prices will go through the roof. Levels of US$100 per barrel or more would not be nightmares but reality. Investors should keep in mind that although peak oil is not yet a fact, peak oil prices are.
