IEA expects oil prices to soar
Some analysts feel crude could top $80 (U.S.) a barrel later this year
SHAWN MCCARTHY
GLOBAL ENERGY REPORTER
June 13, 2007
World oil prices will rise sharply in the second half of 2007 unless OPEC increases production, the International Energy Agency said yesterday, as some analysts predicted that crude could top $80 (U.S.) a barrel later this year.
In a report, the IEA raised its forecast for crude demand this year by some 200,000 barrels a day, and lowered its expectation of non-OPEC supplies by 100,000.
However, officials from the Organization of Petroleum Exporting Countries have so far resisted frequent calls from the IEA - which represents 26 industrialized consuming countries - to open the taps to reduce pressure on prices.
"We would very much hope that OPEC production is at its seasonal low at the moment," David Fyfe, analyst at the IEA, told Reuters news service. "We definitely do need more crude oil."
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Despite a steep runup in prices, the agency forecast the global demand will increase by 2 per cent this year - or 1.7 million barrels a day - to 86.1 million. China is expected to lead the growth, with oil demand there rising by 6.1 per cent.
Analysts said both crude oil and product markets remain tight, with inventories abnormally low for this time of year, though they are building ahead of the peak driving season.
"Global markets on the global oil side have tightened up quite a bit," said Bart Melek, a commodities analyst with BMO Nesbitt Burns Inc. "I do think we're going to get $70-plus crude as summer driving season peaks."
But he added that, unless OPEC increases production, the market will be undersupplied in the second half of the year.
"I think we could easily get to $80, depending on the circumstances of course," he said, adding geopolitical tensions between the United States and Iran, or hurricanes in the Gulf of Mexico could spark price spikes.
Despite the bullish reports, crude prices fell yesterday, as traders anticipated a U.S. Energy Information Agency inventory report that it expected to show a modest increase in stocks.
But that relief could be short lived. Francisco Blanch, a commodity analyst with Merrill Lynch & Co., said OPEC production is now at its lowest level in three years, after steep production cuts earlier this year. But he said demand will outstrip supply with the outset of the summer driving season, and global inventories will be drawn down rapidly.
"OPEC needs to ramp up production to meet the shortfall, and fast!," the analyst wrote in a report yesterday.
Without a production increase, any minor supply disruption could cause prices to spike above $80 a barrel in the second half of this year, he said.
The Merrill Lynch analyst recently raised his long-term oil price forecast - covering 2009 and beyond - to $60 a barrel for Brent and West Texas Intermediate grades, up from $47.50 previously.
In adjusting his forecast upwards, he cited strong global economic growth, improved discipline among OPEC members, lower-than-expected non-OPEC supply growth, and the apparent unwillingness or inability of consumers to reduce demand in the face of high prices.
Mr. Blanch also noted that inflated oil-field development costs are also driving crude prices. He estimated that the new projects in Canadian oil sands now require a price of $60 a barrel in order to achieve the double-digit rate of return commonly demanded by investors.
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