Oil prices just as likely to spike during Iraq war
www.canada.com
By John McLeod
The Daily News
CRUDE-OIL MARKET traders were oversimplifying things again yesterday, sending prices down again after Tuesday’s largest one-day price decline in 16 months. It’s an indication of an optimistic viewpoint, or perhaps wish, that the imminent war against Iraq will be short-lived and there’ll be plenty of oil around.
It’s a bet, according to a report that spilled from yesterday’s Money mailbag, that could be a lot more risky than it might seem. That’s because the study from Peters & Co. Ltd. casts doubt on whether there is enough excess production capacity to replace the supply that will be lost because of the war.
Lost, or “shut in,” as the industry calls it, will be Iraq’s production of about 2.5 million barrels of oil a day, and another half-million barrels as Kuwait “shuts in” some of its production along its northern border with Iraq. Exacerbating the situation is the fact that Venezuela’s production continues to be well below its quota as the oil workers’ strike in that country enters its fourth month.
An analysis of historical periods of crude-oil supply disruptions done by the Peters & Co. experts shows that Saudi Arabia has borne a disproportionate share of production increases to offset previous losses. However, this report notes that the Saudis now have only 690,000 barrels a day of unused capacity, compared to previous disruptions, when that country’s unused capacity was three million barrels a day or more.
Moreover, it suggests that excess capacity among members of the Organization of Petroleum Exporting Countries “may be overstated” by about a million barrels a day.
“We calculate that OPEC’s near-term excess capacity may only be sufficient to replace production losses from Iraq and Venezuela’s sub-peak production, but not large enough to help rebuild worldwide inventories,” the analysts note. “The implication is that crude oil prices may be sustained at well-above normal levels for some time.”
There also is no good news when looking at the ability of non-OPEC oil-producing countries to take up the slack.
“Non-OPEC crude production,” the report says, “tends to run at capacity, except when countries like Norway and Mexico join OPEC in short-term production cuts.”
Further, the largest non-OPEC producer is Russia, which has seen production recover from a post-communism low of 5.5 million barrels a day to a recent high of eight million.
“The bad news,” the report warns, “is that Russia has no unused capacity in the short run, and neither does any other non-OPEC country.”
The Peters & Co. analysts concede that if a war in Iraq is short — and does not result in any damage to oil production capacity — and if Venezuela “surprisingly recovers” to its former production level, then the current war premium on crude prices could quickly evaporate, as crude-oil traders are betting this week.
However, the analysts note that even under that optimistic scenario, the low level of worldwide inventories is likely to keep prices well above normal levels of approximately $22 US a barrel for the near future.
Then there’s this less optimistic scenario:
“If the war in Iraq is protracted and there exist longer-term restrictions on Venezuela’s capacity,” this report warns, “then crude prices would remain very high, and could even spike to higher levels.”
Stay tuned, folks.