Oil Prices at Six-Month High, Long-term Outlook Highly Uncertain

Photo: Satellite image of Strait of Hormuz, through which one third of the world's traded oil passes each day [NASA].

World petroleum prices hit a six-month high on Tuesday this week, on reports that Iran may preemptively cut exports to six European nations, ahead of sanctions that are to take effect on July 1. Though the Iranian government denied that it intended to stop exports to France, Greece, Italy, the Netherlands, Portugal and Spain, some experts think that it planted the rumor of cuts to test the market's sensitivity. “It is all a conjecture; but for sure everyone is very nervous,” a senior oil trader told the Financial Times.

At US$ 119.99 per barrel, yesterday's top price was the highest since August last year, when the International Energy Agency released oil from its reserves in response to reduced exports from the turmoil in Libya. The IEA has said that it is prepared to release oil again if required to by the situation in Iran or in reaction to other supply disruptions. Near-term, the world oil market is sure to remain highly sensitive to developments arising from Iran's nuclear program and intentions. Existing UN sanctions are beginning to seriously hurt the Iranian economy, which could prompt Tehran to negotiate or retaliate. Iran and Israel appear to be assassinating each other's citizens, and the Israeli government has been openly pressuring Washington for military action. And though the Obama administration been pretty firm in resisting that pressure, the situation is explosive.

Longer-term, expert opinion differs radically about whether the world petroleum market will always be highly sensitive to supply disruptions, or whether the world is about to enter a period of oil surpluses. Writing in Nature magazine on January 26, two scientists argued that the market is at a tipping point, because production has failed to react to higher oil prices over the last five years. "Production at existing oil fields around the world is declining at rates of about 4.5 percent to 6.7 percent per year," they wrote, and increased production from Venezuelan and Canadian oil sands will not be big enough to keep pace with growing world demand.

Espousing exactly the opposite point of view, a senior policy expert at London's Kings College has said that oil prices are much more likely to fall than rise, starting this year. In the Financial Times on January 17, Nick Butler wrote that oil supplies are plentiful, with surplus capacity running at more than 4 million barrels per day (mbpd) and set to rise to 8 mbpd by 2016. "High prices over the past five years have encouraged new developments across the world and given new life to established fields." Meanwhile, though demand in China continues to rise sharply, it is down significantly in the United States, Europe, and Japan. The IEA, says Butler, has sliced its 2030 global demand estimate from 130 mbpd to barely 100 mbpd.

Being neither a geologist nor a global oil market analyst, I am agnostic, and being a mere journalist, I'm grateful I have no excess capital to risk one way or the other.

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