This Position Paper examines various explanations for the high, volatile prices witnessed through 2008, and for what is currently driving prices. We argue that in the preceding 5 years production failed to keep pace with demand (spurred by non-OECD economic growth). This tightened OPEC's capacity cushion, amplifying the effect of otherwise-minor geopolitical disruptions to supply.
Scope
* An overview of global oil market dynamics through the last 5 years; supply, demand, regional variations and historical context
* An explanation for the spike in oil prices through 2008, examining the relative impacts of economic growth, capacity constraints, and speculation
* An analysis of current oil price dynamics and likely direction in the near term
Highlights
The relative decline in non-OPEC oil production (mainly from Russia) and tight capacity margins in Saudi Arabia - OPEC's key swing state - amplified otherwise insignificant external factors, resulting in higher, more volatile price patterns.
The present return to oil prices between US$65 - US$75/Bbl has been driven partly by a return to growth in Asia and a slowing rate of decline in Europe. However, the recovery should at this stage be seen as a financial recovery only, so the rebound does not truly reflect genuine fundamentals
As Saudi Arabia's massive Khurais field comes on stream OPEC's capacity cushion will widen to comfortable levels again. This will allow the swing producer to vary output according to changes in non-OPEC supply. Thus although the recession was responsible for the collapse in oil, OPEC's increased capacity will keep prices low beyond the near term
Reasons to Purchase
* Understand global oil price dynamics over the past 5 years and formulate your own position on the causes of the price spike in 2008
* Determine the underlying factors currently driving oil prices and the relative weight of these factors against one another
* Understand what will shape the price of oil in the near term and beyond
Partial Table of Contents:
-- Full ToC is available at http://www.fastmr.com/
DATAMONITOR VIEW
CATALYST
SUMMARY
ANALYSIS
The high oil prices witnessed in 2008 were the result of the OPEC capacity cushion reaching historically tight levels
By any measure, price movements between 2007 - 2008 qualify as one of the biggest oil price shocks in history
In the past, price shocks have arisen as a result of supply disruptions
There were no major supply shocks between 2005 - 2008; rather, output stagnated whilst demand continued to grow
Demand is a function of income - not price; as countries became richer, they consumed more oil thereby increasing demand
The growth in oil demand is a function of spectacular economic growth across the world but especially in China, India, Brazil and partly Russia
Much of the new demand came from China which nearly doubled its share of global oil consumption between 2000 - 2008, encouraged by subsidy
Global output stagnated because certain fields' production went into decline but Saudi Arabia - OPEC's swing producer - did not increase supply commensurately
The practical upshot of increased global demand alongside static output from Saudi Arabia was a gradual erosion of the OPEC capacity cushion
Non-OPEC supply growth had come from the Russian Federation but under-investment in pipelines and E&P began to make itself felt in 2005
In addition to demand and supply fundamentals, financial markets also exaggerated oil price movements although it is hard to quantify the impact
The tight capacity margin amplified otherwise insignificant external factors, resulting in higher, more volatile price patterns
How can we explain the sudden return to high prices in 2009?
Oil prices in 2009 have been erratic and volatile, and are already up to $70/bbl despite the still-fragile state of the global economy
Buoyancy in oil futures can be partly explained by slowing rates of economic decline in the West, and an astonishing return to growth in Asia
Others point to fundamentals remaining tight; strong long term growth in China & India against a backdrop of hard-to-retrieve supplies
Khurais will massively increase OPEC's spare capacity, reducing the impact of supply disruptions elsewhere - whither geopolitics?
APPENDIX
Further reading
Ask the analyst
Datamonitor consulting
Disclaimer
List of Figures
Figure 1: Real and Nominal year-average crude oil prices 1965 - 2009
Figure 2: Year on year change in global oil supply and year-average price
Figure 3: Year on year change in global oil supply and demand
Figure 4: A two-fold increase in a state's income more-than doubles its oil consumption
Figure 5: Global economic growth has been unusually high for 8 years, driven by non-OECD states
Figure 6: From 1993, Chinese oil demand begins to outstrip domestic production
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