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Andreoli on Oil & Fuel: OPEC to the rescue…maybe not

By Derik Andreoli
September 21, 2012

Staying abreast of developments that impact oil supply and demand helps shippers and carriers understand and plan for fuel price fluctuations; so the recent news coming out of Saudi Arabia must have left many in the logistics and transportation industry scratching their heads.

A recent Saudi statement said “the current price is too high…we would like to see oil prices back to $100 per barrel.” This statement, released on September 18, caused oil traders to speculate that the country will ramp up production and the price for a barrel of Brent crude fell from $117 per barrel to $112.

It’s one thing to suggest that production will increase, and another to actually open the taps wide enough to push oil prices down. Today’s prices are a far cry from $100, and over the last year, oil prices have dipped below this level only once during a six-week period between June and July.

Instability in the Middle East North Africa (MENA) region, which provides one out of every three barrels of oil that the world consumes, continues to drive risk premiums up, and it’s doubtful that Saudi Arabia—the only nation with any appreciable amount of surplus oil production capacity—has enough firepower to cause oil traders to avert their attention from the violent protests in Libya, the mounting tensions between the West and Iran, and the steady decline in surplus production capacity.

According to the Middle East Economic Survey, in August, Libya produced 1.5 million barrels per day (mbd) and Iran produced 2.8 mbd. According to the EIA, total OPEC surplus production capacity is only 2.1 mbd.

Surplus production capacity expressed as a percentage of global consumption is the best predictor of oil price movements. Prices spike severely whenever surplus production capacity dips below 1.5 percent of global demand, and prices rise when surplus production capacity declines.

Currently global demand is 89.5 mbd, and surplus production capacity is hovering at 2.5 percent of global demand. If just 750,000 bpd of production is lost, surplus production capacity will dip below 1.5 percent, and prices will skyrocket. Alternatively, demand rising faster than the addition of new capacity will drive the same result.

With the advent of hydraulic fracturing and the rapid rise in production of shale oil, one might be inclined to think that surplus capacity has been on the rise. But this is not the case. In fact, surplus production capacity peaked at 5.1 percent in the fourth quarter of 2009 and the average price refiners paid for a barrel of oil was just $73. Surplus capacity as a percent of global consumption has declined each and every quarter since then with the exception of the fourth quarter of 2011.

Looking forward, we must ask ourselves what could reverse this trend in declining surplus production capacity. What could cause production capacity to begin growing faster than demand?

About the Author

Derik Andreoli

Derik Andreoli, Ph.D.c. is the Senior Analyst at Mercator International, LLC. He welcomes any comments or questions, and can be contacted at .(JavaScript must be enabled to view this email address).


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