Implications of IEA Forecast for World Crude Oil Demand

Dan Steffens |

Oil StocksYesterday, I asked one of our Energy Prospectus Group members, Lou Powers for his comments on this week's increased crude oil demand forecast by the International Energy Agency ( IEA), based in Paris.

Lou is the President of Powers Petroleum Consultants.  He has more than 50 years of experience in the oil & gas industry, including two years as ARAMCO’s Chief Petroleum Engineer.  He is the author of a new and timely new book entitled “The World Energy Dilemma” that is being published this winter by PennWell.  Below are Lou's thoughts.

Schumacher in his book “Small is Beautiful” published in the 1970’s said , “The world will appreciate those most who say Stop Look and Listen rather than those who say  look it up in the forecast, because one cannot predict the future unless one knows  what is in the mind of those who control it.” How true today when it comes to oil prices.

A few years back when I gave talks on oil and gas prices I would get questions like “what do you believe oil and gas prices will be six months from now?”.   I remember answering, if I could tell you that I would not be here today I would be on my yacht like the Oil Minister of Saudi Arabia, then Sheik Yamina.

Today, the IEA is forecasting World demand to be 89.3 MMBbls/day  in 2011 some 1.3 MMBbls/day higher than in 2010. The IEA also said demand by 2012 will be 91.0 MMBbl/day.   Most of this demand growth is coming from the developing countries, primarily China and India, as they try to satisfy their demand for fuel as their transportation systems moves from bicycles, to motor scooters, to automobiles.  China had 18 million new vehicles hitting the road in 2010 and they are on-track to add more than 20 million more in 2011.

With essentially all of the world surplus crude supply in OPEC, principally Saudi Arabia, who knows what the price of oil will be six months from now let alone a year from now. Considering now that the region is covered by a ring of instability with what has been labeled the “Arab Spring”, maybe now the “Arab Summer”.

On the supply part of the equation, Saudi Arabia is the big Kahuna with production targeted in June of 10 MMBbl/day up from 8.4 MMBbls/day just a couple of months ago.  The real question is “Do they have more in reserve capacity should world demand actually reach the level forecast by the IEA?”. The most recent data I have is that Saudi Arabia reached 9.7 MMBbls per day in June versus their targeted 10 MMBbls per day and that their Asian demand in August was comparable to the amount supplied in June.

A problem for the world planners to understand is that a current Bbl of Saudi surplus capacity is not the Bbl that the world's refiners need.  The 1.6 MMbbls per day of lost Libyan oil is not the same barrels the Saudis may have in reserve. The Libyan oil was extra light whereas most of the Saudi surplus is now medium to heavy and not a substitute for the lost Libyan production.  This probably helps explains part of the reason why the spot price for Brent is now some $15-20 dollars higher than the daily quoted price for West Texas Intermediate ( WTI) , which is  the reference price quoted for U. S. price of oil.

Another question for planners should be the Saudi’s willingness to produce more than 10 MMBbls per day just to keep the price down.

The Saudis have not produced over 10 MMBbls/Day since I was there in the 1977-79 period as Aramco’s Chief Petroleum Engineer.  Could they have produced more, sure, but stated by his Excellency Sheik Yamina back then and recently reiterated by the King, “Someday our Grand Children will need this oil.” In 1978 the Saudi’s set their plan to produce no more than 10 MM Bbls/Day in the future and have conducted their investment plan in line since that time but the West has paid little attention.  Production capacity is related to investment.  Today the Saudi’s probably have no more than 12 MMBbls/day of oil capacity.

What about the Goldman Sachs (GS) price forecasts of $120 per Bbl by year end and $140 per barrel next year for Brent Crude.  Yes, both are a good probability considering instability in the world and the increasing demand for more and more oil.  $300 per barrel or higher could also occur if peace and tranquility cannot be maintained in the Kingdom of Saudi Arabia. Today, July 14, as this is being written, the Brent price for oil is $118.30 per bbl and WTI is $98.00 per barrel.  Remember this is after the release from the U. S. Strategic Petroleum Reserve and European storage of some 60 MMBbls.  Interesting that the prices paid for the Gulf Coast stored oil averaged $107.00 per bbl

Saudi Arabia is besieged by both external as well as internal problems, with the current trial of some 85 would be terrorists being held in the Kingdom right now;  some with the reported goal of blowing up Saudi Armco Oil Facilities.  You may remember the dismal failure of the terrorists who tried to blow up the Abqaiq processing facilities in 2007 where 7 MMbbl/Day of world oil supply flows. Had they been successful, the world probably would have already experienced $300/Bbl oil; at least for a few months.

A final truism, supply will always equal demand, the question is, “What will the price of oil have to be to bring the two inline?”

For those interested to know how we got into this dilemma and what should be done to help mitigate at least some of the U. S. Energy problems EPG recommends Lou Powers new book  TheWorldEnergyDilemma You can save 12% off the cover price by pre-subscribing now.  The book should be available this Winter per the publisher, PennWell.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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