Sharp Rise In Energy Demand May Pressure Higher Oil Output

July 19, 2011

The energy chess board is spread out. Moves and counter-moves are in the making. The International Energy Agency [IEA is the advisory body to Organization of Economic Cooperation and Development-OECD] is taking another look at the oil markets later this week to decide its next move.
The IEA is now expected to convene its members by July 23 to decide whether to release more emergency oil stocks. In its July monthly report, the IEA warned that despite the 0.8 million bpd [barrels per day] increase in OPEC production in June, the need for additional oil supplies this quarter from the group has barely diminished.
“We’re still seeing a sharp rise in the call for the third quarter overall,” David Fyfe, the IEA Oil Industry & Markets head emphasized, adding, “we’re really going to be assessing the situation very carefully in the early part of next week.”
The gap between actual OPEC output and what the world needs the [cartel] to produce in the third quarter to meet seasonal demand increase, was 1.3 million barrels a day in June, versus 1.5 million barrels a day in May, the IEA said. A significant part of this supply gap will be filled by the emergency stock release during July and August, avoiding a “damaging and sustained surge in international oil prices,” the IEA emphasized.
Although Fyfe appears convinced, that the IEA move last month was correct, his view is not shared by everyone. Germany and Italy are likely to oppose a second release of emergency [strategic] oil reserves by the IEA, a French government source was quoted as saying on Friday.
This impression was reinforced when a German government official said that oil reserves previously released by the IEA have not been fully utilized. Question marks about the demand side of the equation continue to haunt the markets.
On the other hand, analysts kept speculating about the real reason behind the move. The appetite for oil from strategic reserves is greater today than it was after Hurricane Katrina in 2005, the IEA said. Issuing a firm rebuttal to critics, the IEA underscored the draw-down was having the intended impact. “In the case of crude oil, anticipation of more supplies from some Middle Eastern countries first, and then from IEA strategic stocks, helped to put downward pressure on prices,” its Monthly Oil Report insisted.
For the IEA to make another release from its strategic reserves is extraordinary in many ways. There are definite clouds on the crude horizon. Investor appetite seems subdued after China’s crude imports tumbled by 11.5% in June from a year earlier to 4.8 million barrels per day, their lowest in eight months. Investors remain on edge also on fears the Euro zone crisis could spill over to Italy, the region’s third-largest economy and Spain – reinforcing fears about the global economic downturn.
And in the meantime, Saudi Arabia is ramping up production. It has significantly increased its output in June compared with May and could produce more in July, the executive director of the International Energy Agency conceded last Tuesday. “There is a significant increase from Saudi in June, and probably in July too,” Nobuo Tanaka said on the sidelines of a meeting at the European Parliament.
IEA estimated that Saudi output increased to 9.7 million bpd in June – the highest level since February 2006. It suggested the kingdom’s production has continued to climb this month, possibly reaching 10m b/d. A person familiar with the matter said that Saudi Arabia has offered extra crude to its customers for August but refiners, particularly from Asia, have largely declined.
A senior OPEC Gulf delegate also told Reuters that Saudi Arabia produced more than 9.8 million barrels of oil per day in June – despite an emergency stock release by consumer nations. Production of 9.8 million bpd would mark the highest monthly figure this year and an increase of as much as 900,000 bpd from the previous month based on a Reuters survey of May output.
The ongoing fluctuation in the market seems more a result of geo-political and global economic undercurrents, rather than fundamentals. Drawing down from the strategic reserves could only carry a limited impact. After all this is not a tool to be used to bring the prices down. It was meant as a strategic cushion – and it should remain so.
Apparently IEA gave in to political pressure and now feels itself in a corner – the step has failed to deliver. It’s time IEA steps back from interfering in the market mechanisms. That has never been its mandate, and it has limits to its powers in that direction.
Source: Arab News, Saudi Arabia, July 17, 2011. Changes were made in keeping with the editorial policy of www.memrieconomicblog.org

By Syed Rashid Husain
Another reason why the Saudis are asking for Nuclear power. The also use their oil for electricity. It’s a Catch 22