I looked the news at Yahoo Finance and intrigued by its title “Oil Prices Rise to a New Intra-day Record”. Although, this high breaking record price at US$ 86 – US$ 87 per barrel is not higher than early 1980’s inflation adjusted oil price of US$ 96 – US$ 101 per barrel (actual price of the 80’s is US$38 per barrel), but I saw two scenarios. Global oil market is in the midst of searching a new equilibrium the other this is only a new market sentiment. This topic encourage me to do a little research.
Looking back from the new millennium until now, we have seen that after OPEC production cuts that drive oil price up to US$ 35 – US$ 36 per barrel, in the beginning 0f 2000 oil price began to take a downturn and reach US$ 20 – US$ 21 per barrel before 9/11 in 2001. After 9/11 that caused U.S. economic slowdown oil price keeps rallying up, with few turbulence caused by war in Iraq etc., and reach US$ 78 – US$ 79 per barrel in 2006. Afterwards, oil price slipped to US$ 55 – US$ 56 per barrel, before rallying up and reach new record today!
Based on IEA data (2004 – 2008E):
Global Oil Demand (MMb/d) : 82.3 ; 83.7 ; 84.5 ; 86.0 ; 88.2
Global Oil Supply (MMb/d) : 83.2 ; 84.4 ; 85.2 ; 86.1 ; 88.2
OPEC Crude Prod. (MMb/d) : 33.1 ; 34.2 ; 34.3 ; 36.0 ; 37.1
Global Oil Demand Growth : 3.9% ; 1.7% ; 0.9% ; 1.8% ; 2.5%
Global Oil Supply Growth : 4.2% ; 1.5% ; 0.9% ; 1.8% ; 2.5%
OPEC Crude Prod. Growth : 7.4% ; 3.6% ; 0.2% ; 4.9% ; 3.1%
Global GDP Growth : 5.3% ; 4.9% ; 5.5% ; 5.2% ; 5.2%
Looking at supply side, I see tight oil production in the future, because honestly I don’t believe on IEA estimate that OPEC oil production will grow 4.9% and 3.1% respectively in 2007 and 2008. Because looking in the past two years OPEC oil production only grow 3.6% and 0.2% in 2005 and 2006. With OPEC oil production about 40% of world oil production, I think being concerned on OPEC oil production is necessary.
Looking at demand side, China and India growing economy with increasing consumption of oil per capita push demand for oil upward, even though recent global economic slowing supposed to hamper global oil demand. Looking at history, when the U.S. economy is slowing down in 2001 oil price is rising, on the other hand, in 1998 at Asia Economic Crisis oil price stumble to US$ 15 per barrel.
Personally I think that oil price in the range of US$ 85 – US$ 86 per barrel is only a matter of sentiment, but to go back into the range of US$ 60 is also absurd, I think the objective price range of oil will be trading at US$ 70 – US$ 80 per barrel.
