FACTBOX-Why are oil prices so strong ?
LONDON, May 10 (Reuters) - Saudi Arabia's call for OPEC to
cool prices by increasing supply aims to douse a rally that has
sent oil prices up around 20 percent this year to the highest
level in 13 years. Despite Saudi Oil Minister Ali al-Naimi's
comments, oil prices are still within a dollar of the $40 mark
after rising 22 percent this year. Following is a list of the
main factors behind oil's price surge.
-- Low inventories.
Oil companies have sought to become more efficient and free
up capital by holding lower stocks of oil. This has given the
oil industry less of a cushion against sudden supply
disruptions.
A wave of oil mergers following 1998-1999's price crash also
reduced the number of companies holding inventory. A series of
supply disruptions last year -- the war in Iraq, Venezuela's
general strike, and ethnic unrest in Nigeria -- further cut into
stocks.
-- OPEC supply management emboldens speculators
The OPEC oil cartel, which controls around half the world's
exports, has worked hard to stop stocks building -- especially
in the United States -- during periods of seasonally weak
demand. Ministers have announced plans to cut production before
prices start to weaken, giving refiners no chance to replenish
stocks with cheap crude or products.
The resulting lack of stock cover leaves refiners more
vulnerable to supply disruptions and increases the likelihood of
price spikes. This in turn has attracted heavy buying interest
from big-money speculative hedge funds.
"OPEC strategy has shaped oil markets into a bullish machine
in a tense international environment," said consultants PFC
Energy. "This has caught the attention of speculators and hedge
funds, who have magnified the current pressures in oil markets."
The post-September 11 chill in relations between Saudi
Arabia and the United States means that Riyadh is no longer
willing to act as a guarantor of cheap oil as during the 1990s.
"While the Kingdom remains the ultimate guarantor of oil
supplies in case of emergency, it has given up its role of price
moderator inside OPEC", PFC Energy said.
-- Political tensions in oil producing nations
Tensions in the Middle East, especially Iraq, have
undermined traders' confidence in security of supply from the
region, which pumps a third of the world's oil. Iraqi exports
have finally recovered to pre-war levels but traders fear they
will be disrupted again in the run-up to the June 30 handover of
power to the Iraqis.
A possible August referendum over Venezuelan President Hugo
Chavez' rule could again destabilise exports from a big U.S.
supplier. Potential unrest in Nigeria is another flashpoint,
while traders fear Islamic militants could also target oil
infrastructure.
Shootings at a Saudi petrochemical plant earlier this month
have fostered fears of a larger attack on the kingdom's
tightly-protected oil facilities.
Concern over possible supply disruptions have spurred many
countries, including the United States, to increase their
strategic oil inventories, which withdrawn further supply from
an already tight market.
-- Rising demand
China's economic expansion has given a dramatic boost to
world oil demand, sucking in crude and refined products from
all around the world. Unless China's economy overheats, traders
expect its fuel demand to keep growing for the next two or
three years, which has encouraged the speculative hedge funds
to bet that high oil prices are here to stay.
At the same time, sharper growth in the U.S. economy, which
devours a quarter or all world oil, is driving competition
between Asia and the U.S. for supplies.
The demand growth has caught analysts such as the
International Energy Agency by surprise. Consumption forecasts
have been too low, which means that producers have been keeping
supplies even tighter than they needed to prevent stocks
building.
Higher demand means that a shortage of refining capacity
that has plagued the United States for the last four years has
now spread to Asia, again leaving the global oil supply system
more exposed to disruption.
--Refinery bottlenecks
Environmental regulations are pushing up the price of
making fuel, forcing companies to build expensive new
facilities and making it harder to ship supplies between
regions.
In the United States, individual states demand an array of
different gasoline blends. This makes it harder to ship
supplies between states and to import supplies from abroad.
The high costs of building the units needed to make the new
grades of fuels means that capacity is in short supply.
Environmental concerns has also made it more expensive to
build new refineries, and much harder to get the necessary
permits.
The United States accounts for about 45 percent of world
gasoline consumption, with demand bolstered by the growing
numbers of low-mileage-per-gallon sports utility vehicles on
America's highways.
This has driven a growing need for the high-quality light,
low-sulphur crude that is good for making gasoline. Most of
OPEC's crude is heavy and high-sulphur.
-- Scarcer oil
Big oil reservoirs are becoming harder to find and more
expensive to develop. Many of the oil provinces outside OPEC
are mature, which means that finds are now smaller, need more
costly technology to develop and fall faster from peak
production.
Oil companies have also been cautious on spending since the
'97-'98 price crash slashed their share prices and forced them
into a spate of mergers. They have focused on large-scale
projects, which will give them good margins.
Many of these ventures are in remote areas, which demand
expensive equipment and are more susceptible to delays.
Forecasts of non-OPEC supply growth -- especially when the
rebound in Russian production is stripped out -- have
consistently been overstated, giving OPEC much more room for
manoeuvre.
The increased cost of finding and developing non-OPEC oil
has fuelled speculators convictions that oil markets are a good
long-term bet. Royal Dutch/Shell <RD.AS>'s reserves troubles
have reinforced the view that oil is becoming harder to find.
In OPEC, which holds around two-thirds of the world's oil
reserves, many nations either do not allow foreign investment
in oil, or have unattractive investment and legal terms.
This has slowed down production capacity growth in most
OPEC nations, meaning that most are producing flat out to meet
current demand. Only Saudi Arabia holds substantial spare
capacity, giving it even more leverage over prices.
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May-10-2004 19:04 GMT
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