Oil Markets Continue to Look Tight

The release of the EIA’s Short-Term Outlook on Tuesday September 11th provided ongoing confirmation that oil supply markets remain tight in spite of OPEC’s announcement that it will add 500,000 bbls/d to global markets in November. According to its report “World oil consumption rose by 1.2 million barrels per day in Q2 2007 compared with Q2 2006. China, the Middle East, the United States, and India accounted for most of the increase in oil consumption. EIA projects that world oil consumption will increase at a year-over-year rate of 1.8 million bbl/d during the second half of 2007.” However, it does cite recent volatility in financial markets as having an unpredictable influence on demand.

On the supply side, it says that “Non-OPEC oil production is projected to grow by about 600,000 bbl/d during 2007 compared with year-earlier levels” and that announced maintenance at fields in the United Arab Emirates has lowered its projection for OPEC crude oil production in the fourth quarter by 100,000 bbl/d 30.9 million bbl/d. In 2008, the EIA expects that OPEC will increase production slowly, to an average of 31.4 million bbl/d, in order to manage inventories and maintain prices. Expected gains in OPEC production will keep surpluses running at between 2-3 million bbls/d through 2008 according to the report, leaving the market vulnerable to unexpected supply disruptions.
On global inventories the EIA states that at the end of June 2007, Organization for Economic Cooperation and Development (OECD) inventories were 2.66 billion barrels, near the high end of the 5-year range. It’s projections of world oil supply and demand indicates that OECD inventories may register a counter-seasonal stock draw in the third quarter and inventories are expected to decline at a faster-than-average rate through the fourth quarter to leave inventories at the low end of the last 5-year range.

On the same day that the EIA released its report OPEC announced that it would seek to increase production by 500,000 barrels a day effective November 1st. OPEC said it would be ready “to swiftly respond to any developments which might jeopardize oil market stability and their interests.” But the reality is that OPEC has been producing more than its quota anyway because of high demand. The 10 countries of OPEC’s 12 that have been allocated production quotas — all except Angola and Iraq — pumped an average of 26.7 million barrels of crude oil a day last month, according an estimate by Bloomberg, or 900,000 barrels a day more than their collective target. Yet the OPEC announcement had little impact on markets where oil prices again rose as concerns grow regarding inventories and expectations that there would be a big drop in oil supplies in the inventory data to be reported September 12th by the United States Department of Energy.

While there is upward pressure on oil prices there is also uncertainty about longer-term demand as the subprime issue accelerates and potentially impacts demand later in the year and beyond. Despite that uncertainty, oil markets remain tight in terms of supply and demand, as they have done for around 4-years now. Against that kind of fundamental backdrop, speculative forces can continue to have an impact on price formation an market direction.

This article also appeared in Energy Hedge issue 55. Energy Hedge is the publication of the Energy Hedge Fund Center - www.energyhedgefunds.com