Crude supplies are actually lower than some official estimates indicate, while demand is unlikely to fall anytime soon, according to a statement by analysts led by Jeff Rubin at CIBC, an investment bank. They forecast that these tighter supplies and continued strong demand will drive oil and gasoline prices to roughly double their current levels by 2012.
“It is increasingly clear that the outlook for oil supply signals a period of unprecedented scarcity,” said Rubin. “Despite the recent record jump in oil prices, oil prices will continue to rise steadily over the next five years.”
The front-month crude contract slid Thursday to $116 a barrel, after hitting a historic high of $119.90 a barrel Tuesday. Retail gas prices averaged $3.56 a gallon Thursday, according to AAA, a new record high. See Futures Movers.
Some analysts, however, said crude prices could turn lower. Standard & Poor’s predicted Thursday that crude prices could tumble to about $90 a barrel by the end of this year with the U.S. economy struggling in recession, though the range of that forecast is plus or minus $50. See full story.
CIBC based its prediction on an analysis of crude-production estimates by the International Energy Agency, which the investment bank says has overstated supplies because the agency counts natural-gas liquids as part of the output. Stripping out natural-gas liquids, the global oil market is much tighter, and oil production will hardly grow, they added.
“While natural-gas liquids only account for 10% of total supply, they account for virtually all of the increase in petroleum-liquids production since 2005,” said Rubin in a news release.
“Stripping out natural-gas liquids, oil production has not grown for over two years, which certainly goes a long way to explaining why oil prices have doubled over that period,” he added.
The portion of natural-gas liquids in total oil production is increasing, from about 4% in the 1970s to an estimated 10% by 2012, CIBC said. Natural-gas liquids are not a viable substitute for oil and cannot be economically used as a basis for gasoline, diesel or jet fuel.
Latest data from the Energy Information Administration, the statistical arm of U.S. Energy Department, indicated domestic drilling of natural gas liquids was increasing, while domestic oil production was falling.
Natural gas liquids production averaged 2.4 million barrels a day so far this year, gaining 4% from the same period of the last year, while crude output fell 1.9% from a year ago to 5.1 million barrels.
More natural gas comes with oil
Beyond methane which is what the home consumers burn, natural gas at the well contains a range of readily liquefiable gases, which agencies like the IEA have traditionally included in total oil supply.
IEA, a Paris-based energy adviser to 27 developed countries, said in its April monthly report that global oil production stood at 87.3 million barrels a day in March.
While natural gas can occur on its own, much of the world’s natural gas is found together with oil.
James Williams, an economist at WTRG Economics, an energy research firm, agreed that natural gas liquids found together with crude oil have been increasing, while “there isn’t much growth in oil,” he said. “The lack of oil growth has been due to the lack of investment.”
Accelerating depletion of existing oil fields and a lack of investment in new fields have resulted in a rising ratio of natural gas to oil in drilling in mature oil fields.
Some oil producers have been promising to invest more to increase production capacity. Abdalla Salem el-Badri, secretary general of the Organization of Petroleum Exporting Countries, said early this week the cartel is planning to spend $160 billion over the next four years to boost oil production capacity by 5 million barrels a day. See full story.
Demand in non-OECD countries to exceed OECD
While supplies are seen tight, there is little evidence to suggest that there will be any reduction in oil demand, CIBC predicted, as demand growth outside the Organization of Economic Cooperation and Development offsets slowing demand in OECD countries.
Countries such as Brazil, China and Russia have seen surging sales of automobiles, while car sales in the United States and Europe have been declining or flat. Gasoline, diesel and other transportation fuels account for about half of the world’s oil consumption.
CIBC predicted that by 2012, oil consumption in the rest of the world will exceed OECD. OECD countries currently consume about 50 million barrels a day of crude, 13 million barrels a day more than non-OECD countries.
Demand from major oil producers and exporters is also seen rising. Over the last three years, oil consumption in OPEC members has grown an average of over 5% a year. Combined demand from OPEC members, together with Russia and Mexico, already stood at about 13 million barrels a day, the world’s second largest after the U.S.
“With production faltering, soaring rates of domestic fuel consumption will soon cannibalize export capacity,” adding more pressure to the world energy market, said Rubin in the report.
Fuel consumption in some oil producing countries was partly boosted by extremely low prices. Retail gasoline was only about 25 cents a gallon in Venezuela and 60 cents a gallon in Saudi Arabia, Kuwait, and Iran.