The current record high crude oil prices are unsustainable, according to economists surveyed by I-Net Bridge, but a return to last year’s Opec basket of seven crude oils’ average of $28,10 per barrel is also unlikely, mainly because of the depreciation of the dollar against other currencies.
Opec’s basket price has been above its preferred target band of $22 to $28 per barrel since December 2 2003 and has averaged $35 so far this year.
Oil prices rose sharply in Tuesday-morning trade, continuing to go to record highs on increasing fears over supply, with strikes in the key oil-producing countries of Nigeria and Norway.
Brent crude broke through the $51 mark on Tuesday, while United States futures prices surpassed $54, reaching record highs of $51,50 and $54,45 respectively.
With no hint of any solution to the supply crisis on the horizon, some analysts maintain that oil prices can only move higher with a $60-per-barrel price the next target.
Previously, Opec aimed to keep the basket price within a range of $22 to $28, which was set in 1999, by raising output by 500Â 000 barrels per day if the basket price held above $28 per barrel for 20 consecutive trading days, or lowering output by 500Â 000 barrels per day if the basket price went below $22 for 10 consecutive trading days.
Opec has not been using its automatic mechanism of upping output to bring the price back into the range, and has attributed high oil prices to geopolitics and speculation on oil futures markets. However, it did raise its production quota by two million barrels a day on July 1, and by another 500Â 000 barrels per day on August 1.
Analysts doubt whether Opec has much more spare production capacity with which it can ease prices; only Saudi Arabia is thought to have any meaningful spare capacity remaining.
Set in 1986, Opec’s basket price is based on the average prices of Algerian Saharan Blend, Indonesian Minas, Nigerian Bonny Light, Saudi Arabian Arab Light, Dubai Fateh, Venezuelan Tia Juana Light and Mexican Isthmus.
According to the South African Petroleum Industry Association, South Africa produces about 45% of its liquid fuel requirements. Sasol supplies about 33%, Mossgas about 7% and other crude oil producers roughly 5%.
Other sources say South Africa imports roughly 270Â 000 barrels of oil per day. At $35 per barrel, this equates to about $3,5-billion per year, or R22,5-billion per year at an exchange rate of R6,50 to the dollar. At $50, the import bill rises to $5-billion or R32,5-billion.
Oil imports used to represent about 6% of total imports, but have moved up to the 18% level in the middle of the year and are now the single biggest import item.
Mineral imports have surged from only R947,37-million in January 2004 to R6,67-billion in June 2004. The more-than-sixfold increase is due to a combination of higher oil prices, increased oil demand due to a surging economy and rising alumina imports as the Hillside III aluminium smelter ramps up aluminium production.
Rand crude oil prices have only risen by 24,3% over this period, showing how large the volume increases have been.
United Kingdom-based Business Monitor International (BMI) said the past few months have been critical for the oil markets, but it believes oil prices will decline next year.
“While fundamentals remained healthy, prices soared owing to unforeseen events and the intervention of speculators. Without a sudden and dramatic stock build, a ‘hard landing’ for prices now looks unlikely. Opec has used all of the tools in its armoury and still failed to overcome volatile markets.
“Furthermore, we anticipate that prices will remain strong over the medium term and, against the prospect that Opec will raise its target price to $30 per barrel when it meets in December, we have revised our price forecasts upwards in 2005 and beyond,” BMI said.
BMI now forecasts an average price of $38,50 per barrel for the Opec basket in the fourth quarter, compared with a current price above $43 per barrel.
In 2005, the BMI model — based on individual forecasts for 57 countries and using their gross domestic product growth assumptions — points to an Opec basket price of $31 per barrel, with prices falling to $28 per barrel over the medium term.
Brait economist Colen Garrow expects Brent crude to ease to about $40 per barrel a year from now.
“I feel oil prices at these levels are unsustainable for a few reasons. Oil pipelines and platforms in the Gulf of Mexico will be repaired. Also, with developed countries’ interest rates heading higher and the outlook for the global economy looking more subdued next year than it is now, chances are good that demand for oil will decline.
“Opec also has to consider the fact that as prices of their crude heads higher, so too will research into alternative energy sources increase. It is therefore not in their interest to have oil prices at these high levels indefinitely,” Garrow said.
Sanlam economist Jac Laubscher has similar views and expects the Opec price to fall to near $35 per barrel in the middle of next year.
“I do not expect a return to the $22-to-$28-per-barrel range due to the depreciation in the US dollar, but a range of $26 to $33 would be sustainable over the medium term,” he said. — I-Net Bridge