Statoil sees world’s spare oil capacity at 2 mm bpd in 2005

Nov 09, 2004 01:00 AM

The world's spare crude oil production capacity is expected to increase from the current low of 300,000-500,000 bpd to over 2 mm bpd in the first half of 2005, helping to ease pressure on the world oil markets, Statoil's head oil analyst said.
Statoil's Tor Kartevold said that while greater spare capacity for medium to sour crudes -- basically from the Middle East -- will help ease upward pressure on crude prices, the supply and demand balance for light, sweet crudes may remain tight. Kartevold said this assessment, "is based on a general market view that the growth in global oil demand will slow to the 1.5 mm-2 mm-bpd range in 2005."

An unexpectedly high increase in global demand compounded by supply constraints have resulted in extremely tight spare production capacity, pushing crude prices to month after month of record highs. In October US oil prices hit almost $ 56 a barrel -- up around 75 % since November, 2003.
The spread between the price of sour and sweet crudes has also wideneddramatically this year. Earlier, the spread hit almost $ 14 a barrel between sweet Brent and sour Dubai crudes.

But Kartevold, chief oil analyst for the third largest crude seller in the world, told that while he expects all key elements of the crude value chain to remain at full capacity, spare sour capacity in the system should rise as demand growth slows and production capacity rises.
"Eventually we'll be less concerned about the supply of medium to heavy crude grades, but the big question for 2005 is the market supply-demand balance for light, sweet crude products," he said. Kartevold said global growth in crude demand will be the critical element for spare capacity.

World demand growth rates hit an unforeseen high of 3.7 mm-3.9 mm bpd in the second quarter of the year, Kartevold said, particularly due to Chinese demand way above most analysts' forecasts, he said.
There are signs demand growth is easing back to more normal levels, slightly more than 2 mm bpd in the fourth quarter and forecast to fall to between 1.5 mm bpd and 2 mm bpd in the first half of 2005.

Additionally, although Russian production is at near full capacity, Kartevold says it is continuing to increase by around 500,000-700,000 bpd a year. He added, however, "the weather, Iraq, the world economy and potential geopolitical confrontations are key driving forces this winter."
Several market analysts have warned of the potential conflict between the US and Iran, which produces around 3.9 mm bpd. With US President George Bush re-elected, the analysts said there is a greater chance of confrontation given the Bush administration's hawkish rhetoric on Iran and Tehran's push to continue its nuclear program.

While Kartevold says the current tightness of spare capacity combined with US stock data suggests crude Brent prices should be in a lower range than at present, "actual and potential supply distortions could exacerbate the tightness, especially for those markets where the buffers are smallest."
He said the driving forces behind the sharp increase of light sweet crudes during September and October were the continued strong growth in world oil demand as well as actual and potential disruption to the production of light sweet crudes.

Analysts have said that besides global oil demand being underestimated in the market by around 600,000-700,000 bpd in the third quarter, Hurricane Ivan's impact on production in the Gulf of Mexico -- a light sweet crude source -- was also stronger than expected. Nigerian and Norwegian strikes that threatened to cut major volumes of output from the two exporters also took place in the third quarter.
Similarly, Kartevold's risk assessment for late 2004 and early 2005 also includes potential supply disruption in Nigeria and Iraq as well as a much colder winter in the US than normal.

Source: Schlumberger
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