Oil prices continue to rise despite peak output and new pipelines
Oil up $5 a barrel in the last week

By Paul Cochrane
Daily Star staff
Saturday, May 28, 2005

Oil prices continue to rise despite peak output and new pipelines

Analysis

BEIRUT: Oil hit $51.90 a barrel in midday trading yesterday, up $5 from the same time last week. Oil is once again heading skyward despite OPEC pumping almost flat out and the opening of a new pipeline linking Central Asia with Europe this week that should create an alternative supply of oil for the West. What is driving this latest spike? The first and obvious reason is that demand is still exceeding supply, particularly in the booming markets of the Far East. Second, the U.S. driving season is looming, with a long summer ahead and plenty of SUVs on the roads guzzling gas.

But is this week's rise a blip or are prices likely to continue to soar to April's peak of $58, or even surpass it?

The overall opinion of oil industry experts in a recent Deutsche Bank report was, hold onto your seats, oil will rise again. These claims seemed spot-on this week when oil started to climb amid speculation the European Union could slap sanctions on Iran unless the Islamic Republic suspends its nuclear program.

But by Thursday, the potential nightmare of sanctions on OPEC's second largest oil producer was scuttled by the U.S. lifting objections to Iran applying for WTO membership. Nevertheless, oil continues to rise.

Some analysts believe that if prices continue to push upwards and get into the heart-attack-potential $70 to $80 price band, demand will fall and prices will return to less eyebrow raising prices. On the other hand, others dismiss such predictions, believing oil prices will continue to rise precisely because demand is more likely to increase than diminish. To others analysts a major concern is an often overlooked aspect of oil supply transportation. Many oil companies have expansion and higher production output in mind, but with a backlog for oil tankers in the dockyards of South Korea and Vietnam, it might be years before the quantities of oil needed will get from A to B.

What could cause the price of oil to go down?

The significance of the U.S.-backed Baku-Tbilisi-Ceyhan pipeline is that it undercuts Russia's longtime grip on Central Asia's vast energy sources, and OPEC's quotas. What's more, Central Asia is awash with light crude which is far easier to refine and get to the gas station than OPEC heavyweight Saudi Arabian heavy crude.

But the pipeline will only ship 1 million bpd to Turkey's Mediterranean coast, only around 1 percent of global oil production. Equally, a planned $880 million trans-Balkan pipeline that intends to bypass the Bosphorous straits bottleneck, announced yesterday, will not become operational until late 2008 or early 2009. By then, that extra output may have only a minimal effect on oil prices.

In the near future, a lot will depend on whether OPEC is able to adequately build global stockpiles in time for the high demand winter season. But most OPEC ministers have said they do not see a need to change output policy when the cartel meets in Vienna next month. The most realistic bet seems the oft-quoted cardiac arrest-inducing prediction of $70 to $80 a barrel.