Global Investment House – GCC Oil Sector – Oil prices have once again breached the US$60/b and have grown by almost 8% so far in 2006. This can be attributed to the market concerns over the supply disruption from Nigeria and uncertainty of oil production from Iran. The situation in Iran could change the apple-cart. The global oil demand is estimated to grow by 1.62mn bpd or 1.9% to 84.6mn bpd in 2006. In the short term, we believe that the oil prices will continue to remain high on the back of current scenarios in Nigeria and Iran, coupled with the maintenance at Murban in the UAE that cut production by 150,000 bpd. Going forward, we believe that the oil prices would remain in the vicinity of US$50/b during 2006, which implies another excellent year for GCC economies.
According to OPEC, the average world oil demand will grow by 1.62mn bpd or 1.9% to average 84.8mn bpd for 2006. An upward demand forecast has been made on more optimistic view of the world economy especially from USA and China. According to OPEC, the improved economic conditions in the world led by consumption spending and capital additions will significantly increase the demand for oil and oil products in 2006. Apart from higher consumption for automobiles and air travel, there has also been substantial increase in demand for residual fuel oil and gas oil for power generation in these countries.
Demand growth expectations for the emerging markets continue to be better than the major developed markets. Asian markets and the Middle East are expected to see relatively high demand growth rates. However, it should be noted that the effect of the rising oil prices has had a palpable effect on the growth of many of the emerging Asian economies, which are highly import dependent for their oil needs. However, an impending price correction in commodity markets could undermine the growth expectations in these regions for 2006.
A distinct increase in OPEC oil production for ’04 continued in the year 2005. Supply pressures in the third quarter of ’05 were also due to events that took place in the Gulf of Mexico (USA). Production increases within OPEC was led by Saudi Arabia, Kuwait, UAE and Libya. Further more, there was an improvement in the geopolitical scenarios in Nigeria and Venezuela compared to the previous year, allowing the production from these countries nudge higher.
However, the current situation in Iran and Nigeria will disrupt the supply balance, thus driving the oil prices further. As a result of this growing concerns, other countries in OPEC announced at the World Economic Forum that it will pump more oil to facilitate the market. This announcement from OPEC came as a relief to many, due to the growing concerns about the supply capacity. Moreover, OPEC also hopes to expand production capacity by at least 1.5mn bpd to 2mn bpd by the end of 2006 to ease fears about any shortage and keep the prices at around US$50/b through out 2006.
Oil prices have climbed about 50 percent in 2005 due to strong demand, driven by economic growth and tight production capacity in OPEC and non-OPEC countries. Price volatility causes fluctuations of income and disrupts government planning in some countries, especially in the Middle East, who rely heavily on oil revenues. As for consumers, it adds uncertainty and threatens the stability of the economy.
We believe that the supply disruptions from Iran will have a major impact on the oil market, which will further bring instability for the world economy at a time when the world has got used to a price of US$60/b a barrel. At the beginning of this year, many analysts thought and viewed a long term stability in the oil market, but the current situation has further added to instability and made the oil market jittery at least for some time. Going forward, we believe that oil prices will continue to remain in range bound, provided that these issues do not continue to swamp the market further.
High oil prices prevailing in the market will provide all the GCC economies with huge trade and current account surpluses. As a result of these huge surpluses, GCC governments can invest in order to reform their sectors and in turn fuel the private sector activity. Besides the buoyant oil scenario, what enhances our expectations for the medium term are the multiplier effects of projects in pipeline, which are likely to attract huge investments from the west. However, the best of times are here to remain for at least some more years as portended by the global oil demand forecasts. It is also believed that oil price anywhere above US$40/b is bound to ensure adequate liquidity in the GCC countries.
Talking on the same lines, the liquidity powered by oil prices and steady production led to high growth of the GCC economy. Although, the heavy dependence on oil in the GCC countries continues to remain a concern especially when considering the sustainability of this growth in the longer term. Going forward, we believe that the oil prices will remain high but not quite at the lofty levels that are currently prevailing in the market. Going forward, we believe that the oil prices would remain in the vicinity of US$50/b during 2006, which implies another excellent year for GCC economies.
