Oil Price May Go Up to $250, Warn Experts

Syed Rashid Husain

Crude prices continue to baffle analysts and pundits. With the $100-era a well established fact in our daily life, there is now a growing chatter within the energy fraternity that $200 a barrel may not be a far fetched idea altogether. Is another global oil shock now gathering pace?

With limited additional supplies, alternative fuel still some decades away and demand far from collapsing, Deutsche Bank is pointing to a “huge risk” that oil prices would continue to rise in the near to mid-term.

“There is a huge risk that the oil price simply continues to escalate until it gets to some level (possibly $250) when demand finally collapses because ordinary people can no longer afford to burn as much energy as they are burning now,” Adam Sieminski, Deutsche Bank’s chief energy economist, wrote in a report last Friday.

Pointing to the reasons behind the analysis, Sieminski underlines, “Oil supply growth in non-OPEC countries is struggling at a time when OPEC has been cautious with its production policies.”

In order to analyze the situation further, we need to look at historical facts too. In the early 1980s, oil demand collapsed only after nominal oil prices rose by a factor of 10 between 1970 to 1973 and 1980 to 1983, from about $3.50 a barrel to $35. Based on the empirical example of factor of 10, Sieminski deduces that since oil averaged about $25 a barrel from 2000 to 2003, prices would have to increase to $250 a barrel in 2010 to 2013 to have the same effect on oil users this time around.

Sieminski continues to argue that strengthening of the dollar would take time to stem the flow of investment into commodities, and alternative energies, such as solar power or biofuels, are at least a decade away from contributing to energy supply.

A Bloomberg report also quoted information provider Global Insight as projecting that crude oil could peak in the US at $135 a barrel in the next two months. Oil might rise to $135 as the declining dollar draws investors seeking a currency hedge, before new supplies see prices fall, Global Insight’s Simon Wardell was quoted as saying.

And in the meantime, OPEC president Chekib Khelil too has joined the chorus, hinting at significantly firmer crude markets in the near term. Projecting that oil prices could even hit $200 a barrel, Khelil blamed weakness in the dollar and global political insecurity for the current market woes. Establishing a direct relationship between the sinking dollar and the ascending crude prices, Khelil claimed that with the dollar losing one percent of its value, oil prices rise by $4 a barrel and vice versa.

Talking to Algeria’s El Moudjahid newspaper he argued, “I don’t think that any increase in production could help lower (crude) prices, because there is a balance between supply and demand and the stocks of gasoline in the United States have recorded a surplus and are at their highest level for five years.”

And OPEC has a point. Energy futures fell sharply last Wednesday after surprising jump in the US crude oil and distillate fuel inventories last week. In its weekly inventory report, the US Energy Department’s Energy Information Administration said crude oil inventories rose by 3.8 million barrels, more than double the increase that analysts surveyed by energy research firm Platts had expected.

Meanwhile, inventories of distillates, which include heating oil and diesel fuel, rose by 1.1 million barrels, more than seven times the expected increase.

Some analysts now believe record gas prices are depressing demand for gasoline. “The demand just isn’t there, and there’s plenty of supply,” admits Phil Flynn of Alaron Trading Corp. in Chicago.

On the other hand, despite the official OPEC insistence on not raising the output any further, most Gulf Arab states have been producing at higher levels recently. As per the Joint Oil Data Initiative (JODI), compiled by the Riyadh based International Energy Forum, Saudi Arabia lifted its rude oil supply in January and February to one of its highest levels in many years, while the UAE, Kuwait and Iran also pumped at near capacity. Qatar, a relatively smaller oil producer but a major gas power, also boosted its crude output to record levels in February.

Saudi Arabia’s output climbed to 9.216 million barrels per day (bpd) in February and an average of 9.205 million bpd in January and December. The February level was the Kingdom’s highest production in more than two years and one of the highest in a decade. And despite this high output over the last few months, Saudi Arabia maintained a spare capacity of 1-1.5 million bpd - as per its commitment as a responsible oil producer. Indeed being at the top position also brings in a number of responsibilities too. And Saudi Arabia seems fully aware of it.

Although March figures were not available yet, independent estimates showed Saudi and the Gulf output remaining almost at the February levels, if not higher.

The UAE also pumped 2.716 million bpd in February, up from around 2.700 million bpd in January. The output is close to the country’s sustainable output capacity and is the highest since the Emirates began commercial crude exports in the early 1960s.

Kuwait said it boosted its production, including output from the Neutral Zone, which it shares with Saudi Arabia, by nearly 200,000 bpd to a record high of 2.797 million bpd in February. Iran also pumped at maximum capacity of around 4.120 million bpd while Qatar raised production to its highest ever level of 862,000 bpd in February.

And the above figures once again brings under focus that the real issue afflicting the crude markets is not the output factor, as claimed by some in the industrialized world. Output may be one of the many important factors but indeed not the main factor. Other factors, much beyond the control of the OPEC seem to be equally responsible for the woes of the market, if not more, one has to concede.