There is increasing talk about the movement of oil prices in the foreseeable future. For instance, the International Energy Agency (IEA) predicts that oil prices will fall, because of the negative impact of high prices on demand. The most recent monthly report published by the IEA mentions that high prices are already starting to dent demand, which has started to fall a few months ago. The report argues that there is a real risk that sustained $100/bbl will prove incompatible with the current pace of economic recovery. But what does the current situation look like? OPEC's most recent report mentions that the average price of OPEC's basket of crudes rose for the sixth straight month, reaching $110/bbl in March, in an increase of about ten dollars compared to February. The report attributed this to what it called the ‘fear factor', as a result of the Libyan crisis and the possibility of it spreading to other countries in the region, and said that such fears were only exacerbated further by the tragedy in Japan. Oil prices have indeed risen throughout these events. U.S. crude oil prices increased and averaged $103/bbl, even though the U.S. commercial crude oil inventories rose during the same period. This means that there are adequate oil supplies in the market. Brent crude prices also rose and averaged above $114/bbl. Despite the fact that oil supplies from Libya have been disrupted, there is noticeable increase in output coming from Arabian Gulf countries. Also and despite the Libyan crisis, there was no news about shortages of oil supplies in any consuming country. In other words, amid the gush of daily news coming from Libya, being carried around the clock on television, there were no reports about any shortage or scarcity of supplies in European countries, especially those to where the majority of Libyan was exported. This means that there were other parties supplying oil companies with adequate supplies of oils that are similar in characteristics to the Libyan oil. It is worth noting here the absence of any reports suggesting that there were power shortages in Europe, especially in Italy and Spain which import Libyan gas. This means that the concerned companies have managed to obtain alternative fuels to generate electricity, or even alternative supplies of natural gas. As regards to the situation of energy supplies in Japan, the IEA mentions in its last newsletter that preliminary estimates indicate the loss in nuclear energy may be offset by increasing consumption of petroleum products by about 300 kb/day. However, this figure is subject to change and correction, in light of the general economic climate in the country, and the speed with which reconstruction efforts would start. In light of these considerations, it is predicted that Japan's final requirements of additional oil imports will amount to 100 to 200 kb/day, a relatively small amount. The IEA's forecasts notwithstanding, other figures by specialized institutions, including the IEA itself, indicate that demand for oil will increase in 2011 compared to 2010, and that it is very possible that demand will, for the first time ever, reach an average of 89 mb/day. Forecasts of this increase range around the figure of 2 mb/day or more. These figures indicate then, that global demand may very well be growing. So why this talk about demand decline and a fall in prices? Perhaps the reason lies in the possibility that oil supplies from countries outside of OPEC may be increasing, especially from Brazil, the U.S., Canada, Colombia, China and Russia. The information available indicates that this group of countries may have approximately pumped an additional 600 kb/day in 2006. Even in normal circumstances, it is extremely difficult to predict how oil prices will evolve over time, let alone in current circumstances, amid the continuing wave of uprisings and revolutions in the Middle East, which do not seem about to end anytime soon. Further, with the escalation in the sharpness of the political squabble between GCC countries and Iran, it is very difficult to predict the course of political developments in the region, or their repercussions. It is therefore odd to see such statements regarding prices at this particular time. The question then is, do these statements fall under the scope of warning speculators so that they would reduce their investments in trading oil and other basic commodities? This is particularly valid because speculations have pushed prices up in a more drastic manner than that shown in market fundamentals, such as supply and demand, as speculators took advantage of the fear factor dominating the markets. *. Mr. Khadduri is a consultant for MEES Oil & Gas (MeesEnergy)
