Changing market dynamics and the near term outlook for oil prices: whither geopolitics?

Introduction

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

Report Highlights

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List of Tables
List of Figures
Figure 1: Real and Nominal year-average crude oil prices 1965 - 2009 2
Figure 2: Year on year change in global oil supply and year-average price 3
Figure 3: Year on year change in global oil supply and demand 4
Figure 4: A two-fold increase in a state's income more-than doubles its oil consumption 5
Figure 5: Global economic growth has been unusually high for 8 years, driven by non-OECD states 6
Figure 6: From 1993, Chinese oil demand begins to outstrip domestic production 7
Figure 7: Government subsidy kept retail prices artificially low, spurring demand 8
Figure 8: Output of key non-OPEC fields declined whilst Saudi Arabia stagnated (bpd) 9
Figure 9: The OPEC Capacity cushion declined significantly to 2005 and even in 2008 was low by historical standards 10
Figure 10: Similarly, spare refining capacity had been in decline since 1980 11
Figure 11: Annual change in Russian crude oil output 1996 - 2008 12
Figure 12: Correlation between volume of NYMEX contracts and the price of oil 13
Figure 13: The Value of the Green-bank declined significantly during the oil price spike 14
Figure 14: Sequence leading to high and volatile prices 15
Figure 15: Oil prices in H2'08 collapsed as dramatically as they increased in H1 but are already rebounding at an alarming rate 16
Figure 16: Brent and WTI moving average prices December 2008 to August 2009 17
Figure 17: Global Industrial Production Index (2007 = 100) 18
Figure 18: Brazil, Russia, China and India's economic growth will spur oil demand 19
Figure 19: It is unclear where the new reserves will come from 19
Figure 20: OPEC surplus crude oil production capacity 20
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