If the global race between oil supply and demand were to be held today, it would be almost a photo finish.
Despite the fact that global oil supply hit a record level of 83.5 million b/d in July, surging demand continues to sop up the new volumes. The International Energy Agency, in its August Oil Market Report, estimates that supply from the Organization of Petroleum Exporting Countries rose by 525,000 b/d last month, along with added volumes from non-OPEC countries totaling 75,000 b/d. Yet the Paris-based agency's estimate of global demand growth in 2004 remains at 2.5 million b/d, and IEA pegs the call on OPEC oil in the fourth quarter at 28.4 million b/d vs. the group's July production of 29.1 million b/d (including Iraq). That puts OPEC's spare capacity (excluding Iraq) heading into the heating season at about 700,000 b/d. Counting Iraq's spare capacity plus expected capacity increases from the other 10 OPEC numbers, total added capacity in the second half is projected at 1.6 million b/d, up from the present 1.2 million b/d.
IEA sees additional surge capacity—requiring additional drilling—within OPEC at 1.5-2 million b/d.
Meanwhile, stocks of crude and products are roughly at the midrange of their 5-year average levels.
Cutting it close
Looking ahead, the new supply would leave global oil supply at 800,000 b/d and 200,000 b/d below IEA's respective 2004 and 2005 demand forecasts, notes Friedman Billings Ramsey analyst Jacques Rousseau, "which should provide OPEC with additional flexibility to balance the market and crude oil prices in the $30/bbl range until 2006 at the earliest, in our view."
This outlook assumes, of course, no supply disruptions or unexpected further surge in demand (such as with severe winter weather).
Gauged by the past 3 years, the absence of a supply disruption would seem to be an anomaly, not the reverse. And circumstances in Iraq, Venezuela, Nigeria, and Russia do nothing to dispel that view. Which explains why oil prices continue to march towards the critical psychological watershed of $50/bbl.
There is enough oil available today, and the stocks situation certainly has improved. But the paucity of spare capacity in the event of a supply disruption means the market today is poised on a razor's edge psychologically, if not in terms of actual physical fundamentals.
Unless there is a stunning demand shock along the lines of the Asian meltdown of the late 1990s, Rousseau contends that "the global supply-demand balance should remain tight in the coming years...
OPEC capacity additions
IEA puts additions to OPEC capacity at 370,000 b/d by yearend and a further 2.1 million b/d in 2005-07.
So where are the OPEC capacity additions coming from, according to IEA?
While Saudi Arabia is adding 650,000 b/d of capacity this year and another 300,000 b/d in 2006, IEA doesn't factor in those volumes because Saudi Arabia must add 600,000-800,000 b/d of new production each year to offset field declines.
Venezuela's synthetic crude output from the Orinoco extra-heavy crude upgraders is estimated to reach 620,000 b/d later this year and 660,000 b/d by 2007.
Kuwait is likely to increase capacity by 150,000 b/d, to 2.5 million b/d this year, with added increments totaling 450,000 b/d by 2007.
Nigeria is expected to hike capacity to 2.55 million b/d this year, 2.75 million b/d by yearend 2005, and 3.25 million b/d by yearend 2006.
Iran is likely to boost capacity by 300,000 b/d in the coming months, but the UAE isn't expected to register a gain before 2007—and even then only 150,000 b/d. Algeria, Libya, Indonesia, and Qatar could combine for another 270,000 b/d during 2005-07.
IEA puts Iraq's current effective production capacity at 2.5 million b/d, despite Iraqi officials' claims of current levels of 2.8 million b/d and plans for 3 million b/d in 2005, citing its exclusion of potential increases in Iraqi capacity from its analysis "until higher export flows and domestic refinery runs prove to be sustainable."
All of this added capacity, of course, represents a best-case scenario and absence of occasional demand spikes.
Speaking of anomalies...
(Online Aug. 17, 2004; author's e-mail: [email protected])
