How Long Will Oil Prices Remain Stable?
Walid Khadduri Al-Hayat - 28/12/05//
During the past few weeks, crude oil prices stood at reasonable rates - with $50 for OPEC oil basket and $60 for the US light oil. Besides, as some OPEC ministers have forecasted, the basket prices are expected to change slightly in the upcoming period, thus ranging between $45 and 55 in 2006.
In fact, future oil prices are hard to predict. For the past years and three decades were laden with erroneous forecasts, the most renowned of which was an article published in "The Economist" mid-March 1999. This article has sounded the death knell for the expensive oil era, heralding the beginning of a new cheap oil era. But few days later, to the surprise of many, OPEC agreed to organize production and to lift prices - a trend that has been maintained to date.
In other words, one must preferably abstain from predicting oil prices and review, by contrast, the available data.
So, what are the most important factors that affect prices now and in the foreseeable future?
First, oil facilities south of the United States were destroyed. Hence, 1.5 million b/d of crude oil and 25% of US refineries were shut down. Yet, the United States has remarkably coped with this crisis and has not even tapped the crude oil and petroleum products some OPEC countries have offered it. In addition, though prices have reached a record of more than $70 for some days, they have subsequently fallen to reasonable and affordable levels accepted by both producers and consumers. As a matter of fact, this incident reveals that there are sufficient supplies and numerous alternatives to handle the crisis stronger than previously envisaged.
Second, oil companies and consumers face winter in a different manner. Most companies have bought the oil they need in winter and are even getting ready to import it. Indeed, it takes almost 6 weeks to transport oil from the Gulf to the United States. For instance, the oil supplies loaded in January will reach the United States end February or early March. As for the consumer who will need heating fuel in the next weeks, he must pay a huge bill, especially if freezing cold spells hit the northern hemisphere during this period.
So, the difference between companies and consumers in "getting prepared" for winter largely affects prices and the producing countries. In short, companies realize quite well that "demand" will no longer soar in winter. Hence, prices are expected to decline, especially if output level remains high. However, "market" prices will preserve their highs, since cold weather and the sudden shortage in supplying snow-covered regions will boost prices for "consumers," as has been the case in the United States in the winter of 2000.
In this respect, OPEC's extraordinary meeting end next month takes up paramount importance. Will the organization reduce production in the light of the seasonal supply and demand factors? Will it be affected by the then current prices, especially if cold spells hit Europe or the United States just before the meeting, thus lifting prices?
Third, one must take into account the long-term factors. As we all know, price spikes are mainly driven by the current shortage in building refineries. Indeed, building new refineries requires many years of planning and construction. For this reason, such crisis is likely to last for long. Besides, few are the available tankers and numerous are the environmental laws enacted without even taking into consideration the real market supply and demand. In other words, prices will keep on spiraling upwards.
Despite the data so far mentioned, the demand for oil is not expected to decline. By contrast, the US demand has soared to 21.64 million b/d early December. As for the inventory there, it recorded its highest level in five years. On the other hand, the International Energy Agency (IEA) expected in its last monthly report the global demand to surge annually until 2010 by 1.8 to 2 million b/d, thus reaching 94 million b/d by the end of the decade. Accordingly, the demand for OPEC's oil will remain strong.
Amid these different and often contradictory data, prices cannot be maintained at their current level, while OPEC seeks, thanks to its production policy, to ensure that its supplies outstrip the real markets needs. Hence, the industrialized countries will increasingly build up their inventories.
As OPEC is expected to consecrate its meeting end next month to determine whether it can curtail production or not, we cannot but ask the following question: What price level does OPEC seek?
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