IPF: Oil, gas prices to remain high as industry stabilizes

Oil prices should remain at the $50-55/bbl level over this year, interspersed with periods of tension, and thereafter rise on the back of strong demand, constrained supply, and refining tensions, reported IFP in its 2007 Panorama presented in Paris Feb. 2.

Feb 6th, 2007

Doris Leblond
OGJ Correspondent

PARIS, Feb. 6 -- Oil prices should remain at the $50-55/bbl level over this year and possibly part of 2008, interspersed with periods of tension, and thereafter continue to rise on the back of strong demand, constrained supply, and continuing refining tensions, reported Institut Français du Pétrole (IFP) in its 2007 Panorama presented in Paris Feb. 2. The tentative economic outlook also indicated that gas markets would likely suffer from interenergy competition, driven by high prices.

IFP Pres. Olivier Appert said 2006 might be viewed as a year of transition, correcting 2005 oil price excesses as oil demand slowed, the call on OPEC stabilized, and non-OPEC supply increased by nearly 1.4 million b/d—to 51 million b/d.

The oil market presented signs of short-term stabilization, with prices remaining under $60/bbl. However, beyond 2008, futures markets seem to indicate sustained price hikes, taking into account the forward price for West Texas Intermediate crude, noted Appert. While it plunged to a recent low, the 2012 forward price has "fallen by less than half the short-term prices" as the market players still perceive a future production squeeze, he said.

The current slowdown in world oil consumption conceals great regional disparities, supporting higher longer-term prices. Demand is down in all Organization for Economic Cooperation and Development (OECD) countries, but it is still strong in rapidly emerging countries, including China (up 6.2% to 410,000 b/d) and the Middle East (up 5.4% by 330,000 b/d).

Although 2006 confirmed the decline of mature areas like the North Sea and a decrease of OECD output for the fourth straight year, non-OPEC oil production increased significantly elsewhere, namely in the Commonwealth of Independent States, Latin America, and Africa.

Future OPEC output
Before Angola joined OPEC on Dec. 14, 2006, IFP had anticipated the call on OPEC decreasing in 2007-08 and had forecast non-OPEC supply growing by an average rate of 1.4 million b/d/year to the end of the decade. This forecast has been revised downwards to 700,000 b/d from 2009.

Production in many non-OPEC countries is nearing peak, Appert said, but OPEC's influence and its output, which would gain about 1 million b/d over the 2006 figure, will be singularly boosted by Angola's joining OPEC, possibly followed by Sudan and Ecuador, which are mulling such a move.

IFP estimates that OPEC's share of world oil production likely would jump to 44% in 2009 from 41% last year, while global oil demand increases by 4.8 million b/d. "Non-OPEC countries will not be able, alone, to provide the surplus needed in the medium-term," insisted Appert.

He also pointed to other factors likely to push up oil prices beyond 2009, including resource nationalism in a number of countries, growing domestic needs of oil exporting counties, and determination of countries such as Qatar to conserve resources for future generations.

Natural gas
Uncertainties also are besetting the gas industry, as higher prices and supply security in particular have impacted the development of competing energies—oil, coal, and nuclear power—to the detriment of natural gas, said Marie-Françoise Chabrelie, secretary general of Cedigaz.

She sees a "probably slower and more-jerky development" for natural gas in the future. Gas use should continue to rise steadily by an average 2.5%/year to 2010, pulled along by Latin America, Asia-Oceania, Africa, and the Middle East. The construction of additional gas production and transportation infrastructure to aid deliveries also will contribute to increased gas usage.

Escalation of gas use should then slow to 2.2%/year at best. Higher prices are boosting competition from other energies, especially coal, in the power industry in Europe, where several plants are being planned with at least partial carbon dioxide capture. These are due on stream after 2010.

Also emerging are production constraints: lack of exploration and production investment in Russia; difficulties with available gas volumes to supply liquefaction facilities in some countries such as Oman and Trinidad and Tobago; technical problems in Indonesia; and the political decisions of producing countries as in Bolivia or Russia that could jeopardize the future regional and world supply balance.

Chabrelie also perceives growing imbalances in international gas trade between producing areas with surplus supplies and OECD countries where production can no longer satisfy demand. In addition to the huge volumes transported from one area to another, transportation management will become increasingly complex, exacerbated by the proliferation of LNG routes. The share of LNG in total gas trade is due to rise sharply to 30% in 2015 from 22.3% in 2005 driven by flexibility, source diversification, and improved supply security.

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