Royal Dutch Shell Plc  .com Rotating Header Image

Energy Watchdog Expects Oil Markets to Stay Tight

The Wall Street Journal Home Page

Energy Watchdog Expects Oil Markets to Stay Tight

Supply Constraints 
Likely to Persist 
As Demand Rises
By GUY CHAZAN in Madrid and NATALIE OBIKO PEARSON in London
July 2, 2008; Page A8

Global oil markets will remain tight over the next five years, the International Energy Agency warned Tuesday, in a gloomy assessment that offered little respite for consumers battered by record-high oil prices.

The view of the Paris-based energy watchdog, which is funded by the world’s biggest oil-consuming nations, helped push oil prices to near-record levels. Benchmark crude oil rose 97 cents a barrel, or 0.7%, to settle at $140.97 Tuesday in New York, a Nymex closing record. U.S. oil futures set a new intraday high of $143.67 a barrel early Monday.

[Chart]

The IEA forecast global oil supply capacity will rise to just 96.2 million barrels a day in 2013 from 90.4 million barrels a day this year, including crude production from the Organization of Petroleum Exporting Countries, OPEC natural gas liquids and non-OPEC production.

Most of that growth will come early before sharply tapering off. Between 2011 and 2013, capacity will grow by less than one million barrels a day annually, the IEA said.

The IEA’s outlook jibed with the views of oil company executives at an industry conference in Madrid, who said the red-hot oil market reflects deep-seated pessimism about the industry’s ability to open the spigot to satisfy rising demand.

Christophe de Margerie, head of French energy giant Total SA, said there was enough oil available, but confidence was lacking that “the system will deliver oil in the future — knowing that to deliver new oil and gas will take 8 to 10 years.”

The IEA’s report provided scant comfort for a world desperate for relief from the escalating cost of fuel. The oil shock is already badly denting the global economy, with consumers restricting their travel, truck drivers and fishermen striking in Europe and airlines reducing routes or closing down altogether. Saudi Arabia tried to cool the markets by adding 200,000 barrels a day of production last month, but prices continued to climb.

The IEA said it expected crude producers to boost supply in response to an oil price that has doubled since the last medium-term oil market report, issued a year ago. But that hasn’t happened. Demand for fuel was still strong in developing countries, and that, combined with supply constraints, “continue[s] to paint a tight market picture,” the agency said.

“What we’re seeing here is an absence of obvious reactions to price signals,” said Lawrence Eagles, editor of the IEA report. He noted that it takes time for the impact of prices to filter through, especially on the supply side, where “things move much, much more slowly.”

Perhaps one of the most disappointing figures to emerge from the IEA report was its assessment of oil production by nations outside the OPEC cartel. Non-OPEC supply was “paltry to say the least,” said Mr. Eagles, the IEA’s head of market analysis, and had been revised down since last year’s market report. He said crude supply from non-OPEC countries would remain at or below 39 million barrels per day over the next five years, though it would rise after 2013.

That is sobering news for a world that has come to rely heavily on non-OPEC oil in recent years. A massive boost in Russian crude output earlier this decade helped slake the big surge in demand from China and India as their turbocharged economies took off. But the Russian engine has stalled, with some fearing production could even decline this year. Meanwhile, output has long been falling at traditional non-OPEC sources like the North Sea and Mexico.

OPEC spare capacity, though rising over the next couple of years, will fall “to negligible levels” in 2013, the report said. That is bad news because low spare capacity reduces the market’s ability to respond to sudden increases in demand.

Chakib Khelil, the Algerian minister of energy and mines and the president of OPEC, tried to counter the view that OPEC wasn’t doing enough to slake the world’s thirst for oil. He told the Madrid gathering that OPEC was collectively investing $150 billion in new projects that would boost production capacity by four million barrels a day by 2012.

Mr. de Margerie said oil output would reach a plateau of 95 million barrels per day by 2015. Even that, he said, would be a “beautiful success,” because of the need to offset declines at mature fields as well. “It will not go smoothly…to 95,” he said.

The IEA also said that a 4.7% increase in China’s electricity prices for business and industrial users, effective Tuesday, isn’t enough to prevent power shortages that are adding to the country’s oil demand. China’s power generators aren’t likely to be profitable as a result of the price increase — the first in two years — as they can’t pass on rising coal costs to the consumer in full. Coal prices in China have risen more than 60% this year, forcing the government to reintroduce price controls on spot coal sales.

Many generators have opted to temporarily close capacity rather than sustain losses on output, exacerbating power shortages at a time when transport bottlenecks and the closure of small mines are restricting coal supplies.

Such policy decisions will keep having significant implications for oil demand, the IEA said, with blackouts in southeastern China and elsewhere triggering a spike in demand for diesel to fuel backup generators.

Write to Guy Chazan at [email protected] and Natalie Obiko Pearson at[email protected]

http://online.wsj.com/article/SB121490783562819031.html

This website and sisters royaldutchshellgroup.com, shellnazihistory.com, royaldutchshell.website, johndonovan.website, and shellnews.net, are owned by John Donovan. There is also a Wikipedia segment.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Comment Rules

  • Please show respect to the opinions of others no matter how seemingly far-fetched.
  • Abusive, foul language, and/or divisive comments may be deleted without notice.
  • Each blog member is allowed limited comments, as displayed above the comment box.
  • Comments must be limited to the number of words displayed above the comment box.
  • Please limit one comment after any comment posted per post.