by Kamel Al-Harami

22-11-04

Oil producing countries in OPEC and outside OPEC are embarking on fresh efforts to increase their oil production capacity to the maximum levels. These countries include Saudi Arabia, Kuwait, United Arab Emirates, and Libya from OPEC.

Russia, a non-OPEC country is also expected to produce about 9.2 mm bpd on a constant basis from the middle of next year. Thus a total of 3 mm bpd will reach the market by the beginning of next year. This is separate from any new crude that will come out of new Iraq, after it attains stability.

The maximization of oil production capacity is coming onstream despite the fact that oil demand has not picked up at a high level. The demand will be nearly around 1 mm bpd, thus resulting in a surplus of more than 3.5 mm barrels. This will definitely lead to the collapse of oil prices by the middle of next year because demand will be at its bottom.
Besides, most of the new oil on the market will be of the wrong quality. The oil markets, as said previously, is in need of light sweet type of crude and not the medium to heavy type. The new additional oil capacity will harm OPEC by affecting oil prices negatively and lead to low oil prices globally. It will also create disagreements and internal fights among OPEC members.

The organization will be faced with new challenges to agree on new quota levels for members because each of them has surplus production capacity. There is also the quality issue which we talked about earlier. The new oil will be of the heavy to medium type which the market is already full of because there is currently a surplus of about 1.5 mm barrels. Besides, it is discounted heavily against the sweet type by more than $ 17 per barrel and will continue to be discounted further.
Consuming countries and international oil companies are not prepared or willing to invest in new refineries to produce the heavy/medium crude to take the pressure off the market. They are even refusing to share investments in the refining sector becauseof low returns.

Again they leave it to the producing nations to do every thing. So the question that is being asked is why invest in additional production capacity with no financial returns and the consequences of deteriorating oil prices and create surplus capacity for some years to come. Investing in light sweet crude will result in better economic returns immediately because the market needs it. But to invest in wrong quality oil without any economic return is unexplainable.
Oil prices are beginning to come down rapidly. It has reduced by more than 15 % since beginning November at a time when oil demand has peaked. More oil in the market or additional surplus capacity will lead to collapse in oil prices.

Time is not on the side of oil producing countries, demand is appearing to cool and economic growth is slowing down.
A clear vision and strategy are the only answers to justify heavy investment in the right quality of oil. Without them it will be bad news for oil prices.

Source: arabtimesonline