The oil price conundrum

China’s oil imports have moderated so far this year as it is taking a stance not to accumulate reserves when oil prices are high. Also, the move to employ more efficient use of oil in China and India is likely to see sustained demand without “energy shocks”.

The concern is more with the supply of oil – world oil supply has more or less halved in the last decade, largely due to political risks and old and over-exploited mega-fields that are becoming less productive.
Nevertheless, new sources of oil (non-Opec) have also emerged as important players, namely Russia (producing 11% of world oil output), Mexico, the African region, etc. Higher prices might also herald substantially higher investment to enhance efficiency and thus, long-term supply.

In the interim period, there is no risk that we are running out of oil, but the chances of being able to match the estimated growth in demand over the medium term with a rise in production is being seriously questioned – and increasingly factored into the oil price conundrum.

The impact of speculation/political risks on oil prices is far more challenging to determine. About 30% to 35% of oil prices currently are estimated to be speculative in nature, particularly through oil hedge funds, which are aggressively shoring up prices. However, speculative positions don’t last long and it is expected that when the pace of growth in China slows post-Olympics, hedge funds will gradually exit the oil market, which will see prices stabilise themselves.

The crude oil price upward cycle may extend over several years in response to changes in demand as well as Opec and non-Opec supply. In the meantime, expect a three-digit oil price to surface several times over the first half of this year on the back of continued strong demand for oil as the primary energy source as well as risk to supply arising from security threats and the availability of refining capacities.

The Star