Oil price remains dependent on political developments

25 May 2011

Past investments by international oil companies prevent a quick withdrawal from region

The decision by international oil companies (IOCs) to target the Middle East for increased production has left prices vulnerable to political uncertainty, as oil prices will move within a price range of $90-115 a barrel over the coming four years, according to ratings agency Standard & Poor’s (S&P).

Demand for crude is going to increase by 43 per cent by 2035, with emerging markets responsible for the additional consumption, says the ratings agency. To cater for growing demand, oil companies need to find new sources of crude, as production from established reservoirs is steady or declining.

IOCs have looked to the Middle East and North Africa (Mena) region to establish new production facilities, according to Christine Tiscareno, oil and gas analyst at S&P.

“About seven years ago, IOCs decided they needed to invest to provide growth for the next 10 years. So they decided to invest in the Mena region,” she said during a speech in Dubai on 24 May.

Crude output from countries affected by the political turmoil of the Arab Spring accounts for less than 6 per cent of global exports.

But there is a lead time to establishing new production facilities and IOC’s will not be able to shift their production elsewhere in the short term. “The new production over the next 5 years will be coming from that region,” said Tiscareno.

This has left the global oil markets vulnerable to political risk in the region. S&P believes that risk premium based on uncertainty over future developments in countries such as Egypt, Libya and Tunisia amounts to $10-15 a barrel.

For 2011 and 2012, Tiscareno predicts an average price of $105 a barrel. In 2013, prices will average around $108 a barrel.

Nymex Crude Futures currently hover around the $99 dollar mark, having risen to more than $100 a barrel in January for the first time since October 2008.

Oil prices had declined to as low as $30 a barrel in December 2008 as the world economy reeled from the global financial meltdown, after peaking at $145 a barrel prior to the worldwide recession.

Investment bank Goldman & Sachs is also bullish on oil prices, predicting $120 a barrel for European Brent by the end of the year, and raising its 2012 forecast to $140 from $120.

The end of the second quantitative easing programme in the US might put downward pressure on oil prices, said Tiscareno, as it could slow down economic recovery in the US.

Also known as QE2, the programme by the US Federal Reserve boosted spending and consumption by buying up a total of $600bn in long-term treasuries, or government bonds, so increasing the liquidity in the market. After being initiated late in 2010, QE2 spending was reigned in this month.

The absence of short-term liquidity measures might change the outlook of the market. “Hopefully this will make the markets focus on long-term trends,” said Tiscareno.

These include the role of technology, such as the use of enhanced oil recovery (EOR). By increasing the proven reserves of reservoirs, EOR will slow down oil price increases over the long term.

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