Oil Supply Pressures Eased by OPEC

World demand for oil will rise at about 2.0 percent a year for the next five years, but OPEC countries are leading an expansion of production that will replenish a supply safety cushion, the International Energy Agency stated yesterday.  Investment by OPEC will increase the crude production capacity of OPEC countries by 10 percent from 2006 to 2011, with production of natural gas liquids set to increase by 44 percent.

These increases, coupled with rising output from non-OPEC countries, will mean that growth in oil supplies outstrip growth in demand every year until 2010.  This will add vital spare production capacity to the global oil system.  A lack of spare capacity has been one of the key drivers of rising prices in the last 12 months.  Spare capacity acts as a safety cushion by enabling OPEC to increase production in the event of disruption to supplies from an oil producing country.

The assessments were published in two reports by the IEA, one being the regular monthly assessment of the oil market and the other a medium-term outlook.  IEA executive director, Claude Mandil, said in a foreword to the medium-term report: "We believe this projected build in spare capacity to be a positive development that should bring greater stability to the oil market."  Spare capacity, the amount of oil that could be supplied by OPEC countries above actual demand, is set to reach 4-6 million barrels per day in 2011 from the current "razor-thin levels" of about 2.0 million barrels in June.  "Much of this increase comes from recently announced OPEC investments to expand crude and natural gas liquids," Mandil said.

The IEA forecast that global demand for oil would grow by 1.2 percent in 2006 to 84.8 million barrels per day and by 1.8 percent in 2007 to 86.4 million barrels per day.  On average over the five-year period from 2007-2011, demand is set to increase by 2.0 percent annually to reach 93.7 million barrels per day in 2011.  About 60 percent of the 93.7 million barrels required in 2011 would be provided by non-OPEC countries, roughly the same level as now.  OPEC oil capacity production will grow from 32.97 million barrels per day in 2006 to 36.31 million barrels in 2011. OPEC natural gas liquid production will increase from 4.72 million barrels per day to 6.79 million barrels per day.