Chemical companies are still getting used to the idea that crude is trading above $100/bbl. For many of them, this was a complete shock, as many had believed the consensus view and budgeted for a $70/bbl average in 2008. Now, however, worse news is in prospect as forward prices have been racing away this week. 2016 oil contracts yesterday traded just under $140/bbl for the first time.
The picture above shows the global reference chart from the International Energy Agency (IEA). They expect oil demand to continue to increase, driven by growth in China, India and other emerging economies. Higher oil prices don’t affect this growth, as countries such as China have imposed price freezes on oil products, as I noted back in January. Equally, OPEC countries also subsidise oil prices, with many selling gasoline at 10c/litre. As a result, last week’s IEA forecast is for demand in these countries to grow 4.9% this year.
Yet many senior figures in the oil industry are suggesting that it will be difficult to produce the extra barrels required. I noted last November, for example, that Total’s CEO Christophe de Margerie had said ‘it would be difficult to reach even 100m bbls/day’ of production, compared to today’s 87m bbls/day. Equally, as I’ve noted before, it is very difficult for consumers in western countries to cut back on demand. All the easy ‘wins’ were achieved when crude prices rose in the late 19870s/early 1980’s.
Now the only way to make significant cuts would be to change established patterns of behaviour. Veteran investment banker Matthew Simmons highlighted a few of these recently in a presentation to the US Dept of Defence at the Pentagon. – travelling less, for example, and changing global supply chains back to local production. This doesn’t look very likely in the short-term, and so one must assume western oil demand is unlikely (absent a crisis) to reduce very much.
Oil markets are volatile beasts, and it would be no surprise if they were now to pull back again. This would fit with the pattern of previous surges, as when $100/bbl was first reached in January. But the underlying issue for the chemical industry will remain. OPEC does not want to produce more oil, and prefers to keep it in the ground for ‘future generations’, as noted by Saudi King Abdullah last month. Whilst non-OPEC supplies from the N Sea, Russia and Mexico now seem to have peaked.
Chemical companies are already finding it very difficult to pass through price increases based on today’s high oil prices. Perhaps the industry needs to do some thinking now about the implications of these for future demand? And also about what might happen if, as OPEC and other commentators have suggested, prices were to hit $200/bbl by 2010?