Investors in oil are now wondering, how much higher the price of oil will climb? Although most of the recent $4.00 USD (United States Dollar) increase in price is purely speculative. Traders are pushing prices higher in fears of what might occur, rather than any real change in supply or demand.
The International Energy Agency (IEA) has estimated that global demand in 2014 will be 1.2 million barrels higher then was registered for 2013. That is a 1.3% increase, bringing the total daily world consumption to 92.4 million barrels of oil. World production of oil is about 1 million barrels ahead of demand, but this is now shrinking.
Economic growth even at a relatively slower pace, is increasing demand in many countries. Fuel use in the United States for example, had increased to 20 million barrels a day in November of 2013. This was the first time this has occurred since 2008.
When OPEC (Organization of the Petroleum Exporting Countries) met in December of 2013 the decision of the members present, was to maintain production levels at 30 million barrels a day. Declines in output due to national and industry issues in Venezuela, the United Arab Emirates, Kuwait, Libya and Nigeria has kept production in OPEC to within a few hundred thousand barrels, below the target set by the organization. Saudi Arabia by far the largest producer of oil in OPEC, has continued to keep production at 9.75 million barrels.
The international sanctions on Iran although eased somewhat, will not increase world supplies by very much. An increase of 89,000 barrels a day to a daily total of 850,000 barrels, is still an insignificant amount when you consider total world demand.
Production from outside OPEC led by the United States, Canada and Brazil is due to increase this year by 1.7 million barrels of oil in 2014. The total production expected from all countries not in OPEC is expected to be 56.5 million barrels a day this year.
The question on the mind of investors and traders now is, how recent events in Iraq will influence the world price for oil. The price of crude for WTI (West Texas Intermediate) reached a high of $107.54 USD. Brent Crude a more international priced oil gained 48 cents to reach a high of $112.94 USD. However, once investors in crude understood that the majority of the oil produced in Iraq is still in government hands and is not in a war zone for now, the price of oil moderated somewhat. WTI crude oil soon fell to $106.90 USD a barrel.
Around 90% of Iraq’s oil exports of 2.5 million barrels a day at present, are shipped from the southern part of the country which is still 200 miles away from the war zone.
However, it is important to note that a $3.00 USD to $4.00 USD risk premium, will remain in place as long as the militants are threatening Baghdad.
There will be world economic repercussions as well. Higher energy prices will make sluggish growth in North America and Europe much more likely for an extended period of time.
The real issue for world oil production was that Iraq was seen as the answer for the growing demand from Asia particularly India and China. The IEA saw Iraq overtaking Russia as the world’s second largest oil exporter by the 2030’s. The Iraqi government itself had set a target for daily production of oil to reach 10 million barrels a day, as early as 2017. The IEA on the other hand, had forecast a somewhat slower rate of growth in oil production for Iraq, by only predicting a rise to 6 million barrels a day by 2020. By 2035 production was forecast to rise to 8 million barrels of oil a day. The present political situation in Iraq now, makes future growth in the industry much more problematic.
It is now improbable that Iraq will remain a unified country. The production of 3.5 million barrels of crude a day is unlikely to increase. On the contrary, as sectarian violence continues, it is much more likely that oil production will decline in the area. This is important because Iraq at present, is the second largest exporter of oil in OPEC.
The Kurds in the north of Iraq, have taken control of the oil city of Kirkuk. They have also permitted the influx of 700,000 refugees from the Mosul area (2nd largest city in Iraq) which has fallen to the insurgents. The Kurds comprise 15% – 20% of the population of Iraq. The Kurds have already taken control of the country’s 4th largest oil fields. However, the rebels control part of the area where the oil pipeline runs from Kikuk to Turkey, so oil exports from the area have been halted at least for now. The region presently under control of the Kurds has 45 billion barrels of oil in proven reserves.
The Shia mostly in the south, comprise close to 60% of the population. This is where most of the oil is located. It is said that there are 150 billion barrels of proven reserves of oil in this region. The present government of Iraq is mostly comprised of the Shia. The final group is the Sunni in the center of the country. This group traditionally has controlled Iraq. Former dictator Saddam Hussein was a Sunni. They comprise 20% – 25% of the total population of the country. The country is likely to delineate and separate along these ethnic and religious differences.
The growing economic and political instability in Venezuela, is another problem for global oil supplies. The country which may have the largest oil reserves in the world needs oil prices to increase an additional $10.00 USD, in order for the country to balance it’s budget. This is a $25.00 USD decrease of the break even point from last year. The decline has been a result of the devaluation that occurred earlier this year. Inflation is now running at an annual rate of 57.3% in Venezuela. Production has been declining from 2.9 million barrels a day in 2012 to 2.45 million barrels in 2013. Production is forecast to decline even further in 2014, as unrest in the country grows.
The governments of Russia, Nigeria and Bahrain need oil prices for both Brent and WTI to remain above $100.00 USD to balance their own budgets. Brent oil prices needs to reach $118.80 USD for Nigeria, and $134.90 USD for Bahrain for these two nations to balance their budgets. Russia needs Brent oil prices to stay above $101.70 USD to break even on the sale of their oil. A comparison with Saudi Arabia, shows that the kingdom needs the price of Brent to only stay above $93.40 USD to balance their books.
Nigeria is Africa’s largest oil producer. However, domestic sabotage by rebel groups has reduced Nigerian production substantially. The output for the country declined to 1.96 million barrels a day in 2013, the 3rd lowest rate of production since 2000. Forecasts of 2.3 million barrels a day for 2014 will be difficult to achieve, if domestic instability continues in the oil producing regions.
Production in Libya is about 10% of normal capacity. Although two Libyan oilfields resumed output this week, the additional supply is only about 60,000 barrels a day. Current production was about 150,000 barrels a day before the announced increase. It is important to note, that Libya is seen as having the largest reserves of oil in Africa. This would give the nation the 5th largest reserves in the world at 76.4 billion barrels. The problem with Libya is that there has been no real order in the country, since the ouster of the previous government.
This leaves Saudi Arabia alone to make up the difference in world supplies. Production is below 10 million barrels a day and despite claims that the kingdom could ramp up production by several million barrels a day if needed, it will not be easily done. Nor is it clear that it is really possible, in the long term. The feeling among some analysts is that Saudi Arabia would find it difficult to achieve this rate of output, despite assurances from their political leaders.
The only other real alternative then, is North America. Canada and the United States are still expanding production. Thanks to fracking technology, the United States has the ability to become the world’s largest producer of oil by 2015. The country is already the largest global producer of natural gas.
The question for the United States will be how long can these levels of production be maintained?
There are two ways for investors of oil to make money. In the short term the rising instability in the Middle East and elsewhere will guarantee higher prices this summer and later this year. Prices can easily increase $10.00 USD and more. If the oilfields of southern Iraq come under threat, prices could hit risk premiums of $20.00 USD to $30.00 USD. This would have world oil prices nearing $150.00 USD.
Of course the higher prices rise, the more production will increase as less profitable fields are pressed into service. So prices are unlikely to remain at this level for very long. However, it will be a major opportunity for oil investors to reap huge profits.
In the longer term, given the present domestic situation with some important producers of crude oil, output around the world, will be hard pressed to meet future demand. Regardless whether in the short or longer term, oil prices will remain at a higher levels, than has been the rule over the last few years.