China (Platts) -- June 30-July 4, 2008
By reporters at Platts, the energy information division of the McGraw-Hill Companies. For more information about Platts' information products in China, contact Platts at china@platts.com, or call its representative office in Guangzhou at (+86) 20 2881 6588.
Prices continued their unabated rise, with yet another record high punctuating the short US work week ahead of the July 4 holiday.
By Thursday, front-month WTI crude oil on the New York Mercantile Exchange, a key barometer for the global energy markets, settled at a record of $145.29/barrel.
The closing price represented a gain of $1.72/b, or 1.2%, from the previous day. So far this year, prices have surged some 46%.
They have roughly doubled from $71.40/b a year ago and have exploded 13-fold since the beginning of the current bullish mega-cycle, which started in late 1998 and early 1999 when prices touched a bottom of $11/b, now a distant memory.
The market was able to shrug off a rebound in the US dollar, which came despite a 25 basis point rate hike by the European Central Bank to 4.25% and a weak US jobs report.
The US unemployment rate held steady at 5.5% in June, according to data released by the Bureau of Labor Statistics.
"[European Central Bank President Jean-Claude] Trichet has adopted a less hawkish stance in his post-meeting press statement, reducing the odds of an August (interest) rate hike," foreign exchange strategists at Brown Brothers Harriman, said in a report.
"After hiking rates 25 [basis points] to 4.25%, the ECB has dropped the phrase 'a heightened sense of alertness' on inflation and has replaced it with a more moderate approach of 'monitoring developments closely." The ICE Dollar Index rallied to an intra-day high of 72.803 for a gain of 77.2 points.
While crude prices continue on an upward trajectory, bullish news has been lacking.
The one note of caution sounded was that the market has been making consecutive record highs on relatively low trading volume, which some see as marking a less secure rally.
In an interview last week with China Central Television (CCTV), Platts' Senior Market Director David Hanna said, "there are several factors underlying the sustained gains in global crude oil prices.
First and foremost are demand side factors, while one of the biggest supply-side factors has been a bottleneck in refining capacity because of a lack of investment during the previous bear cycle in the 1990's."
Debate on high oil prices moves to Madrid
The week started with news of another gathering of producers and consumers in Madrid, Spain following a land-mark meeting hosted by Saudi Arabia the previous week.
But the only thing that changed was the venue; producers and consumers clung to their respective positions in the debate on what has been behind the dizzying price gains.
Speculation and not oil market fundamentals are to blame for skyrocketing prices, the oil ministers of Saudi Arabia and Qatar said at the World Petroleum Congress in Madrid.
But top oil major bosses from Shell, BP and Repsol disagreed, blaming the surging prices squarely on fundamentals, although Shell chief executive Jeroen van der Veer admitted that there was no current physical shortage of oil.
Saudi oil minister Ali Naimi said Saudi Arabia was willing to produce as much oil as its customers needed but he questioned the extent of demand for additional oil.
Saudi Arabia, which boosted its production by 300,000 b/d to 9.45 million b/d in June, said during international oil talks in Jeddah June 22 that the kingdom would increase output further to 9.7 million b/d in July.
Qatari oil minister Abdullah al-Attiyah blamed speculators for the runup in prices, pointing out that there were unsold cargoes of crude on the water. "If it is not speculation, why do we see tankers floating with no buyers?" he asked.
But Attiyah said that while the market was in surplus, now was not the time for oil producer group OPEC to cut output because a cut would have a psychological impact on the market. "The market is under a lot of psychological pressure, even with the surplus supply."
Saudi Arabia's Naimi, speaking separately in an interview, also ruled out an OPEC production cut.
Meanwhile, Shell's van der Veer, addressing a press conference on the sidelines of the WPC, said: "There is no physical shortage today." But current oil market psychology reflected anticipation of future market conditions, he added. "I don't think that you can blame speculation for the oil price...to blame them [the speculators] is hard to prove."
BP CEO Tony Hayward told the opening session of the WPC that it was a "myth" that speculation was the cause of high oil prices. "There is more to it than that," he said.
"It is a fundamental signal, not about speculation," Hayward said. "Investors are investing in the oil market because they believe the price will go up, based on fundamentals," he added. Record high oil prices "are telling us that supply is not responding adequately to rising demand."
Hayward also said that the era of cheap energy was over. Demand for energy was moving "relentlessly upward," driven mainly by demand from China and India, which was being met "barrel for barrel" by Russia, "where production has begun to decline."
Indeed, Hayward's comments coincided with news that Russia's crude output continued its recent downward trend in June with output reported at 39.835 million mt (9.69 million b/d), raising the possibility that the country could see the first fall in annual oil production this year since 1998.
Given the prospects of sustained strong demand growth, the OECD will have to rely more on frontier areas such as oil sands, heavy oil and deepwater Mexico, Hayward said.
Van der Veer said the task of producing new oil would be less easy than has been the case until now. "Most of the new oil will be difficult," he said.
The Shell chief, sitting beside Repsol's Brufau, was asked to assess the prospects of developing Brazil's recently discovered deepwater offshore reserves in which Repsol is involved.
Brazilian state-owned Petrobras said earlier this year that it had discovered potentially enormous reserves that could rival those of oil giant Saudi Arabia.
But so far no reserve estimates have been given. "We expect a lot of reserves," van der Veer said.
He noted that while demand had risen in 2007, OPEC had actually cut supply while other producing areas were maturing fast or were in decline as was the case in Russia and the UK continental shelf.
In the UK, he said, crude oil production fell by 10% last year. Van der Veer called for a new type of partnership between national oil companies, which he said held 80% of global reserves, and international oil companies, which possess the technology.
Another myth, Hayward said, was that the world was running out of oil.
This was not the case, he said, adding that current reserves of crude oil were enough to last 40 years, gas 60 years and coal, the fastest growing fossil energy source, 120 years.
The world had so far produced 1 trillion barrels of oil and there was another 1 trillion of proven reserves but the remaining reserves "will be expensive to extract," the BP chief said.
The problems were political and not geological, he said. The energy world needed new joint ventures and alliances between the state-owned oil companies and the multinationals, "a new contractual relationship rather than the historical models" that exist today, Hayward continued.
With two thirds of crude oil traded across international borders, lower tariffs were needed, Hayward said, adding that taxation was now "dangerously high" and could impact future investment. "High taxes mean businesses have less money to invest in new production," he said, citing an International Energy Agency estimate that $22 trillion would be needed between now and 2030 to meet future demand for fossil fuels, which he said would still represent the bulk of the energy mix by then.
Another way of making sure future demand was met would be to raise recovery rates from existing fields.
If the global recovery rate, currently averaging 35% could be raised to 50%, this would provide an additional 170 billion barrels of production, or the equivalent of five years of supply.
Updated: July 7, 2008
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