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CALGARY HERALD: 50-$60 oil likely to persist: experts

Strife in Mideast, Africa expected to keep prices high

BY ASHOK DUTTA

Geopolitical tensions and mega investments in pension and hedge funds will continue to keep oil prices at or near current highs for the foreseeable future, the Canadian Energy Research Institute annual oil conference in Calgary was told Monday.

“Until 2004, there was a strong relationship between U.S. crude stock and oil prices, but that has now changed with new factors coming in,” said Michael Lynch, president of Massachusetts-based Strategic Energy & Economic Research.

“Passive investments in pension and hedge funds in the past few years have added a bullish spirit to the market,” he added.

Options trading are an integral part of the oil futures market, but Lynch said the scenario has been exceptional with a “big flood from buyers.”

Growing geopolitical tensions have also taken their toll on oil prices.

In the Middle East, the ongoing Shiite-Sunni rivalry has put at risk production from both Iran and Iraq, who account for nearly five million barrels per day, or 17 per cent of OPEC’s total output. In Africa, civil unrest has still thwarted the return of 600,000 bpd of Nigeria Bonny Light oil to the global markets.

Lynch classified the producers-atrisk under three categories. The first, high threat, includes Iraq, Venezuela, Niger and Chad. Iran and Kazakhstan are considered medium threats. And Sudan, Russia, Azerbaijan and the Gulf of Mexico are at low risk.

“We would love to see Iraq settle down, but that will not happen for five-to-six years,” he said.

U.S-based IHS Inc. said in a midApril report that Iraq’s estimated oil reserves stand at 116 billion barrels — the third largest globally after Saudi Arabia and Iran — with production costs being less than $2 per barrel. This is compared with production costs of $20 to $25, depending on the mining and extraction methods, for Alberta heavy crude.

Recent short- to medium-term oil price forecast by analysts of $50 to $60 per barrel was reiterated once again at the conference. Peter Jackson, director of oil industry activity at the U.K. office of Cambridge Energy Research Associates, said he expects the oil price ride to be bumpy, with volatile markets, and not constrained by market fundamentals. But the overall price band would be maintained.

On the flip side, Charles Slagorsky, senior advisor and chief economist with Shell Canada Ltd., asked if oil prices were going through another commodity cycle.

“Will we see prices at a historical long-term average of $30?” he asked.

However, Herman Franssen president of U.S.-based International Energy Associates Inc., said a surge in production of non-conventional oil would be an issue to watch.

“At WTI (West Texas Intermediate) prices of $55, we expect 10 million bpd by 2030,” according to an abstract presented from his paper. “Of this, 50 per cent will be from Canadian oilsands and Venezuela.”

Western Canada is aiming to nearly quadruple oilsands and heavy oil production to 3.997 million bpd by 2020 from 1.466 in 2005, according to the Canadian Association of Petroleum Producers.

OPEC members will also increase output, with Libya and Indonesia aiming at a moderate growth.

“But, the biggest growth will be staged by Nigeria,” Lynch said, adding: “It may go up by 1.5 million bpd.”

Lynch added that with an upsurge in OPEC’s spare capacity, he expects the Vienna-based oil grouping will cut another one million bpd over the coming 18 months.

Since Nov. 1, OPEC imposed two rounds of cuts removing 1.7 million bpd from the global oil market.

Swing-producer Saudi Arabia and Venezuela both accounted for a majority of the total cuts, at nearly 1.2 million bpd.

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