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The West's energy watchdog the IEA upped the pressure on producer club Organization of the Petroleum Exporting Countries, OPEC, to increase output by forecasting a steep rise in oil demand later this year and predicting the strain on supply would last over the medium term.

Oil prices rose in response to the latest sets of numbers from the International Energy Agency. Brent crude hit a session high of nearly $115 a barrel on Thursday, up almost $2.

The Paris-based adviser to 28 consumer countries raised its assessment of how much OPEC oil would be needed this year by 400,000 barrels per day (bpd) to 30.1 million bpd in a monthly report.

Data from the OPEC has also indicated a need for more oil in the second half of this year.

But the group failed to agree on an output increase at a meeting in Vienna last week and its secretary general took exception to public comment from the IEA, which has said it would release oil from emergency reserves if necessary.

'Strategic reserves should be kept for their purpose and not used as a weapon against OPEC,' Abdullah al-Badri told the Reuters Global Energy and Climate Summit this week.

In a five-yearly forecast issued in parallel with its monthly update, the IEA made the assumption Libyan output would not return to pre-war levels until 2014.

'We have lost 1.5 million barrels per day of capacity from Libya, baseline demand is higher and spare capacity has been eaten into,' David Fyfe, head of the IEA's Oil Industry and Markets Division, told Reuters.

'I think the market from 2010 through 2012 is looking tighter than we were thinking six months ago.'

The IEA raised its five-year global oil demand forecast by an average of 700,000 bpd compared with the previous medium term report issued in December.

Fundamentals versus speculations
A tightening supply-demand balance on the oil market meant the bull run since late 2010 was largely justified by fundamentals, the IEA said.

Levels of speculative activity were lower than in 2008 when the oil market vaulted to its all-time high of more than $147 a barrel for U.S. crude.

So far this year, prices for Brent have peaked at just above $127 a barrel.

The rally has inspired investment, especially in non-OPEC countries, whereas OPEC expansion plans have been stalled 'due to a lack of investment and project delays,' the IEA said.

Overall oil supply should increase from 93.8 million bpd to 100.6 million bpd by 2016, a net rise averaging 1.1 million bpd annually, but slower than the average demand growth of 1.2 million bpd.

Significant OPEC crude capacity growth is expected from joint venture investments in Iraq, Angola and the United Arab Emirates, with smaller gains from Nigeria and Venezuela.

Iran, however, which has suffered from years of sanctions, is expected to struggle to increase supply and its capacity will fall below Iraq's, the IEA said.

'An adverse investment climate, however, sees Iranian crude capacity decline by 0.8 million bpd to 3.1 million bpd, falling below Iraq's capacity by 2014.'

As supplies rise more slowly than demand, OPEC's margin of surplus oil that can be quickly added to the market if needed is 'uncomfortably thin' at around 3.3 million bpd.

Many analysts are concerned the buffer of spare capacity has been shrunk by increased output from Saudi Arabia, which almost single-handedly controls the world's spare production.

The kingdom said it would provide whatever oil was needed even without a new OPEC supply agreement, but the IEA is still saying that might not be enough as Saudi oil is not the same quality as the missing Libyan barrels.

All the extra fuel demand is from non-OECD countries, with China alone accounting for more than 40 percent of the increase.

China's per capita oil demand is still well below that in the United States, the world's biggest oil user.