By Richard Orange
05 February 2006
WHEN a US President starts making ludicrous claims that the US can cut its dependence on Middle East oil by two-thirds, you know that the fever gripping the oil market has tipped over into delirium.
Granted, George Bush will be shuffling around on sticks by the time his far-fetched goal is tested in 2025. But after a week in which Exxon Mobil and Royal Dutch Shell posted the largest US and UK profits of all time, and Iranian brinkmanship and Nigerian unrest drove oil in New York back within a whisker of last year’s $70 high, it’s obvious why oil made an attractive theme for a State of the Union address.
With this in mind, The Business has put together an Oil Price Thermometer (click on title of this post to link to article). We asked five of the world’s leading oil market analysts to list what they think could send the boiling point up over the next year. We then asked them to quantify what effect these different threats could have on the world oil prices, starting from a base price of $60 for the UK’s Brent oil.
Adam Sieminski, chief energy economist at Deutsche Bank; Mehdi Varzi, president of Varzi Energy; Leo Drollas, chief economist at the Centre for Global Energy Studies; and Axel Busch at Energy Intelligence, all agreed to take part, along with another anonymous energy analyst ranked in the top five. The general economic pressure is for a fall in prices. The consensus oil price for Brent is already around $55 for this year, next to $64 today.
But the analysts see more than enough geopolitical threats looming to keep the oil price simmering at higher levels. Top of everybody’s list is Iran. All but one of the five analysts agree that military action against Iran leading to a total cessation of exports would push the oil price above $100. Varzi is the odd-one-out, arguing that western oil stocks and extra output from Saudi Arabia, Kuwait and the United Arab Emirates could keep the price down to just $77.
If sanctions, or Iran’s retaliation against them, cut exports by a less calamitous 1m barrels per day (bpd), the analysts see a more modest $5 and $10 on the price. And if tension bubbles along at today’s levels without any concrete actions, the price may even shed a few dollars.
Next in the worry list is unrest and potential sabotage to oil industry infrastructure in Nigeria and Iraq. Should unrest cut 500,000 barrels from the two countries – fairly likely for short periods – the consensus is for an extra $5-$10 on the oil price. A major crisis cutting more than 1m bpd, and it could add $20.
There’s less consensus on other likely troublespots. Sieminski believes that the worsening climate for international oil companies in Venezuela under President Hugo Chavez and Russia under President Putin is significant, with the likely impact on oil exports potentially adding as much as $5 to the price.
Busch highlights political tension between Moscow and its former allies such as Ukraine and Georgia, weighting it at a $2 rise, while Middle-East tension following on from Israeli Prime Minister Ariel Sharon’s stroke and Hamas’s victory in the Palestinian elections could add $3.
The other big threat to supply is the hurricane season in the US Gulf of Mexico. Hurricane gurus are predicting that the number of hurricanes will drop off this year from a recent average of 12 to just nine. But if they’re wrong, and the winds are as severe as last year, the oil price could gain at least $10.
No one sees any one event dragging the oil price down to the extent that a crisis in Iran could send it soaring. Most analysts argue that a slowdown in US economic growth to 2.8% would cut some $5 off the price, with a fall in Chinese growth to around 6% from last year’s 10% having a similar effect.
And, if the International Energy Agency is right in predicting a 1.6m bpd increase in oil production from oil producers outside the Opec cartel, Drollas argues, that could cut prices by as much as $7. Again Varzi is the exception here, arguing that Opec would cut oil production in these situations to keep oil at around $58. The only event any analyst expects to push down the oil price by double-digits is if avian bird flu became a big epidemic, curtailing air travel. Sieminski predicts a $10 cut in the price if this happened.
Even so, a crash is still possible this year. Oil markets already have more than enough oil supply, and many of the barrels being bought today are going into storage, betting on higher prices later on. Drollas predicts that when storage becomes hard to find, it could trigger a sell-off to below $50.
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