Global Oil Market Chugs Forward

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While oil prices have declined over the last several months to roughly $98 a barrel for Brent grade crude oil. Bloomberg notes that the median estimate for the third quarter of 32 analysts it tracks for Brent crude is $114.50 a barrel.

One major factor in the market will be the July 1st implementation of global sanctions against Iran. Analysts note that Iran's daily oil exports in July could fall to 1.1 million barrels per day, down from a 2.2 million barrels per day average in 2011. The second quarter (just ended) is also generally the lowest quarter of the year for global oil demand - historically demand increases in the second half of the year.

On the bearish side, concerns remain about a potential economic slowdown in China, Europe, and the U.S. which would depress energy use and oil imports. The major forecasting agencies are all continuing to predict global demand will increase in the second half of 2012 – but also note that slowing economies may cut their forecast demand growth.

OPEC Demand Forecast

OPEC latest report on global crude oil demand forecasts that it will increase by 0.9 million barrels per day to record levels in 2012. They conclude:

“World oil demand growth in 2012 now stands at 0.9 mb/d, broadly unchanged from the previous report. Given the stabilization of the US economy and the shutdown of Japanese nuclear power plants, world oil demand growth has – at least for the short-term – stopped its declining trend and is showing some growth. Oil demand in non-OECD countries is also indicating a slight improvement.”

opec crude oil demand forecast

Demand in the third and fourth quarter of the year is expected to follow seasonal trends and is forecast to increase a whopping 2 million barrels a day from the current quarter – a period which may also correspond with increased sanctions on Iran and a significant decrease in global supplies (possibly removing nearly 1 million barrels per day from the markets).

The forecast demand for the third and fourth quarter of 2012 are more than 1 million barrels per day more than the actual demand seen last year – as the global economy grows demand for crude oil continues to grow.

IEA Demand Forecast

Last month’s IEA forecast is very similar to the OPEC view of the market. The IEA forecasts demand will grow by 0.7 million barrels per day in 2012, to record levels. Demand in the fourth quarter of 2012 is projected to be 2.5 million barrels a day higher than in the current quarter.

iea global share gdp

In a separate report the IEA laid out some startling statistics on how much more expensive energy has become for developed economies. The Washington Post pointed out that between 2000 and 2010 Europe spent an average of $182 billion per year on oil.

In 2011 Europe spent a record $488 billion on crude oil. In 2012, due to elevated prices, Europe is expected to spend well over $500 billion. To put that in context the Post continues, “the total debt of Greece, which has everyone sweating, is about $370 billion” (chart courtesy Washington Post)

US EIA Reports

The U.S. Energy Information Administration (EIA) estimates that global spare crude oil production capacity averaged about 2.4 million barrels per day during the first quarter of 2012, down about 1.3 million b/d from the same period in 2011. Spare capacity can serve as a buffer against oil market disruptions. There is little or no spare capacity outside of the OPEC member countries.

quarterly opec spare crude oil capacity and wti spot prices 2001 to 2012

Spare crude oil production capacity is now less than 3% of total world crude oil consumption, the lowest proportion since the fourth quarter of 2008.

Low spare oil production capacity tends to be associated with elevated oil prices, oil price volatility, and price spikes. The trend in global spare capacity has been downward for the last several years (see chart, courtesy EIA).

EIA Historical Production Data

Two months ago the EIA released a new set of international oil production data with revised figures going back to 1985. This is one of the most comprehensive revisions in several years. It now includes full year data for 2011. The data covers only crude oil (“black oil”), not total liquid hydrocarbons, which includes natural gas liquids (NGLs)

Dan Steffens with the Energy Prospectus Group summarized the revisions, and his conclusions as to what the data indicates:

“Since 2005, despite a significant transition in the price of crude oil, global oil production has been trapped below a ceiling of 74 million barrels per day. Obviously, new production is coming on line from new discoveries and new technology being applied to oil fields, but it has not been at a rate fast enough to overcome the declines from existing fields. If you are a student of Peak Oil, you know this is exactly the scenario that King Hubbert said would happen right before the world’s oil production began to decline with nothing we could do about it.

The world now consumes almost 90 million barrels per day of liquid fuels. The difference between the global production of crude oil [of around 74 million b/d] is made up by natural gas liquids that are blended in during the refining process. Keep in mind that there are some fuels and lots of materials that can only be made from black oil.

world oil production 1982 to 2010

Overall, global decline in production from existing fields is estimated at a minimum of 4% per year and as high as 6+% a year. Given that new oil resources are developed and flow at much slower rates, the existing declines present a formidable challenge to the task of increasing supply.

When Saudi Arabian production peaks (and that may be happening very soon), I doubt even the massive amounts of capital being invested to develop North American shale oil reserves will be enough to take global production of crude oil higher.”

Chatham House Report on Saudi Energy Use

saudi arabia crude oil consumption by year 1980 to 2010

Chatham House, a consulting think-tank based in Great Britain, issued a report last month on the increasing domestic energy use in Saudi Arabia and future impacts to global markets. The study concluded that energy consumption has been climbing since the early 1970s and shows no slowdown (energy prices are subsidized).

If domestic demand continues along the long term trend the amount of oil available for export would fall. The amount of spare capacity available to meet unexpected shortfalls would also decline, and may impact the ability of the Saudis to stabilize global energy markets. (Chart courtesy Chatham House)

Iran Sanctions

Platts had the following comments on the sanctions that have just gone into effect:

“Oil market fundamentals could become much tighter in the second half of 2012 if EU and US sanctions keep more than 1 million b/d of Iranian oil exports off the market and non-OPEC output disruptions take a turn for the worse, the head of the International Energy Agency's Oil Industry and Markets Division said Friday. The IEA estimates that EU and US sanctions on Iranian oil exports means that 1 million b/d of Iranian crude may struggle to find markets from July, the IEA's David Fyfe said.”

Production slowdowns or interruptions in Sudan, Syria, Libya and other non-OPEC producers remain a threat to markets according to the IEA.

Summary

Long term crude oil supply and demand trends are very positive for companies that have proven reserves in politically secure areas of the world. Short term fluctuations would not be unexpected due to potential supply interruptions or global economic financial shocks, but longer term the bullish trends should prevail.

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