LONDON, May 10 (Reuters) - Saudi Arabia's call for OPEC to cool prices
by increasing supply aims to douse a rally that has sent oil prices up
around 20 percent this year to the highest level in 13-years. Despite
Saudi Oil Minister Ali al-Naimi's comments, oil prices are still
within a dollar or the $40 mark after rising 22 percent this year.
Following is a list of the main factors behind oil's price surge.
-- Low inventories.
Oil companies have sought to become more efficient and free up capital
by holding lower stocks of oil. This has given the oil industry less
of a cushion against sudden supply disruptions.
A wave of oil mergers following 1998-1999's price crash also reduced
the number of companies holding inventory. A series of supply
disruptions last year -- the war in Iraq, Venezuela's general strike,
and ethnic unrest in Nigeria -- further cut into stocks.
-- OPEC supply management emboldens speculators
The OPEC oil cartel, which controls around half the world's exports,
has worked hard to stop stocks building -- especially in the United
States -- during periods of seasonally weak demand. Ministers have
announced plans to cut production before prices start to weaken,
giving refiners no chance to replenish stocks with cheap crude or
products.
The resulting lack of stock cover leaves refiners more vulnerable to
supply disruptions and increases the likelihood of price spikes. This
in turn has attracted heavy buying interest from big-money speculative
hedge funds.
"OPEC strategy has shaped oil markets into a bullish machine in a
tense international environment," said consultants PFC Energy. "This
has caught the attention of speculators and hedge funds, who have
magnified the current pressures in oil markets."
The post-September 11 chill in relations between Saudi Arabia and the
United States means that Riyadh is no longer willing to act as a
guarantor of cheap oil as during the 1990s. "While the Kingdom remains
the ultimate guarantor of oil supplies in case of emergency, it has
given up its role of price moderator inside OPEC", PFC Energy said.
-- Political tensions in oil producing nations
Tensions in the Middle East, especially Iraq, have undermined traders'
confidence in security of supply from the region, which pumps a third
of the world's oil. Iraqi exports have finally recovered to pre-war
levels but traders fear they will be disrupted again in the run-up to
the June 30 handover of power to the Iraqis.
A possible August referendum over Venezuelan President Hugo Chavez'
rule could again destabilise exports from a big U.S. supplier.
Potential unrest in Nigeria is another flashpoint, while traders fear
Islamic militants could also target oil infrastructure.
Shootings at a Saudi petrochemical plant earlier this month have
fostered fears of a larger attack on the kingdom's tightly-protected
oil facilities.
Concern over possible supply disruptions have spurred many countries,
including the United States, to increase their strategic oil
inventories, which withdrawn further supply from an already tight
market.
-- Rising demand
China's economic expansion has given a dramatic boost to world oil
demand, sucking in crude and refined products from all around the
world. Unless China's economy overheats, traders expect its fuel
demand to keep growing for the next two or three years, which has
encouraged the speculative hedge funds to bet that high oil prices are
here to stay.
At the same time, sharper growth in the U.S. economy, which devours a
quarter or all world oil, is driving competition between Asia and the
U.S. for supplies.
The demand growth has caught analysts such as the International Energy
Agency by surprise. Consumption forecasts have been too low, which
means that producers have been keeping supplies even tighter than they
needed to prevent stocks building.
Higher demand means that a shortage of refining capacity that has
plagued the United States for the last four years has now spread to
Asia, again leaving the global oil supply system more exposed to
disruption.
--Refinery bottlenecks
Environmental regulations are pushing up the price of making fuel,
forcing companies to build expensive new facilities and making it
harder to ship supplies between regions.
In the United States, individual states demand an array of different
gasoline blends. This makes it harder to ship supplies between states
and to import supplies from abroad.
The high costs of building the units needed to make the new grades of
fuels means that capacity is in short supply.
Environmental concerns has also made it more expensive to build new
refineries, and much harder to get the necessary permits.
The United States accounts for about 45 percent of world gasoline
consumption, with demand bolstered by the growing numbers of
low-mileage-per-gallon sports utility vehicles on America's highways.
This has driven a growing need for the high-quality light, low-sulphur
crude that is good for making gasoline. Most of OPEC's crude is heavy
and high-sulphur.
-- Scarcer oil
Big oil reservoirs are becoming harder to find and more expensive to
develop. Many of the oil provinces outside OPEC are mature, which
means that finds are now smaller, need more costly technology to
develop and fall faster from peak production.
Oil companies have also been cautious on spending since the '97-'98
price crash slashed their share prices and forced them into a spate of
mergers. They have focused on large-scale projects, which will give
them good margins.
Many of these ventures are in remote areas, which demand expensive
equipment and are more susceptible to delays. Forecasts of non-OPEC
supply growth -- especially when the rebound in Russian production is
stripped out -- have consistently been overstated, giving OPEC much
more room for manoeuvre.
The increased cost of finding and developing non-OPEC oil has fuelled
speculators convictions that oil markets are a good long-term bet.
Royal Dutch/Shell <RD.AS>'s reserves troubles have reinforced the view
that oil is becoming harder to find.
In OPEC, which holds around two-thirds of the world's oil reserves,
many nations either do not allow foreign investment in oil, or have
unattractive investment and legal terms.
This has slowed down production capacity growth in most OPEC nations,
meaning that most are producing flat out to meet current demand. Only
Saudi Arabia holds substantial spare capacity, giving it even more
leverage over prices.
Copyright 2004, Reuters News Service
