How long can the apparent stability in oil prices last?

The relative stability in oil prices may be fragile, the IEA’s Deputy Executive Director has warned, with much depending on whether economic malaise or supply-side problems predominate in 2012.

Ambassador Richard Jones was addressing the US Senate Committee of Energy and Natural Resources in Washington DC. He briefed the Committee on oil market developments in 2011 and the IEA’s outlook for the oil market in the year ahead, stressing that those hoping for a calm oil market in 2012 may be disappointed.

Impact of high prices on economy

Since last spring, the high level of USD100-120 per barrel of oil has become relatively established, with prices oscillating within that range. Before this period, prices had risen from a low point of below USD40 per barrel in February 2009 to a high of around USD120.

 “Oil prices at elevated levels pose significant problems for import-dependent countries,” Ambassador Jones said in his testimony on 31 January.

 “In this regard, [the IEA] estimates that the proportion of total world GDP dedicated to oil expenditures was back up above 5% for 2011, as it was during the economic slump of 2008 and during several previous periods of severe economic downturn. High oil prices may or may not have caused these episodes of economic difficulty, but they certainly did not help.”

Demand growth in 2012

Looking ahead to 2012, Ambassador Jones explained that the IEA’s ‘base case’ view envisages global oil demand growth of just over 1 million barrels per day (mb/d).

The IEA believes that non-OPEC oil supply and OPEC gas liquids (which are not subject to OPEC’s production management system) will rebound by as much as 1.6 mb/d combined, leaving OPEC producers an opportunity to trim their collective crude supply by around half a million barrels per day to 30 mb/d, while still maintaining inventory levels to roughly where they are now.

At the same time, the Deputy Executive Director stressed that there is uncertainty surrounding the ability of non-OPEC supply to rebound “from the awful year it suffered in 2011.”

Ambassador Jones noted, however, that the IEA and many of its analytical peers believe non-OPEC supply can rebound, continuing the trend of reinvigorated growth that was seen in 2009 and 2010.

What about Iran?

The recently announced US sanctions on entities having financial dealing with Iran, and the upcoming EU embargo on oil imports from Iran, will clearly affect the mix of crude oil supply available on a regional basis, Ambassador Jones acknowledged.

Iran exports around 2.5 mb/d of crude oil, with 65% of this going to Asia, and some 30% into Europe, he explained. A significant portion of the 1.3 mb/d of Iranian crude oil imported by IEA member countries is likely to be affected by these measures, but the full impact of the sanctions and embargo have yet to be fully assessed.  “Ultimately, [the IEA] thinks refiners denied the ability to import Iranian oil will most likely find the extra barrels they need, albeit they may need to pay higher prices than might otherwise have been the case,” he said. In addition, Ambassador Jones observed that there is a widespread expectation that Iran will try to retain or increase sales to non-OECD buyers, potentially making extra spot sales into Asia at discounted prices.  The Deputy Executive Director added that of greatest concern for the oil market is the threat by Iran to impede traffic through the Strait of Hormuz (17 mb/d, equivalent to some 20% of global oil supplies) if an embargo is applied, as well as its threat to retaliate against neighbouring producers if they try to boost exports.   “[However,] to a degree, such threats have already been priced into the market, while the likelihood of a prolonged stoppage for Hormuz transits is seen as being fairly low,” he added.

IEA stands ready

Ambassador Jones concluded that at present there is no physical oil supply disruption underway, but added that the IEA remains vigilant and ready to act if a major disruption occurs.  “Emergency oil stocks, as their name suggests, are for use only when the market’s ability to efficiently reallocate supplies in a crisis is compromised,” he said.   “Ongoing investment in new productive capacity, especially in diverse areas likely to be less susceptible to geopolitical risks, and a progressive improvement in energy and oil use efficiency provide longer term routes to greater supply security. But, if the mere availability of IEA strategic stocks helps calm otherwise jittery market nerves in 2012, so much the better.”