Oil demand unsated, even at $82

Sharply higher oil prices – which hit another record yesterday – have failed to drive down demand or encourage new sources of supply, leaving global consumers increasingly dependent on the Organization of Petroleum Exporting Countries.

From a brief low of $50 (U.S.) a barrel touched last January, crude prices have climbed steadily to hit a record $82.38 a barrel yesterday, fuelled by booming demand in the newly industrialized countries and OPEC supply restraint.
Energy economist Peter Tertzakian, of Calgary-based ARC Financial Corp., said he expects oil prices to peak at about $85 a barrel, with a floor of about $75.

Goldman Sachs on Monday forecast U.S. oil prices would surge to $85 a barrel by the end of the year, up $13 from its previous forecast, and said crude could climb as high as $90, owing to tight supplies.

After cutting production by some 1.7 million barrels a day last winter, OPEC agreed last week to increase supply by 500,000 barrels. However, Mr. Tertzakian said markets are now concerned that the cartel has limited ability to sharply increase output if required.

“OPEC capacity to supply growing world demand is once again narrowing,” Mr. Tertzakian said.

Typically, when commodity prices are high, new suppliers come on the market and demand is reduced by switching to other sources of supply and efficiency gains.

Now, however, non-OPEC producers are having trouble maintaining production rates, given the decline in output from the North Sea and conventional North American supply.

“You are getting a response, but the decline rate in existing production is higher, so you have to run harder just to stand still,” said Kevin Lindemer, managing director of the energy group at Global Insight Inc.

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