Crude oil prices could head lower in 2007 from current levels of about $60 per barrel, as global production catches up with demand and geopolitical risks lessen, experts say.
Despite hitting record highs in July, oil futures in New York ended the year about 1,5% lower than at the beginning of 2006, with futures in London up just 2%.
”This year, the main story has been the political risks story,” Global Insight oil analyst Simon Wardell said.
In 2006, amid an already tight supply situation, concerns about geopolitical instability in producer regions pumped prices higher and led to the all-time highs above $78 per barrel in July and August.
The threat of United Nations sanctions against Iran over its nuclear stand-off with the West led the Islamic republic to hint at threatening disruption to its oil exports, which in turn sent prices surging.
In Nigeria meanwhile, militant attacks on oil facilities in the Niger delta have slashed the African country’s output by up to a third.
Prices were also supported this year by the July conflict between Lebanon and Israel, worsening violence in Iraq, and a hardening of relations between the United States and South American oil giant Venezuela.
And despite North Korea not being an oil producer, news that it had test-fired missiles supported prices as traders felt the move could strengthen Iran’s position in its diplomatic battle with the West.
Aside from geopolitical concerns, oil futures won a lift from fears that the 2006 hurricane season would match the previous year’s ferocity and due to the temporary closure of facilities in Prudhoe Bay in Alaska, the biggest US oil field.
These threats and disruptions led oil prices to strike record high points. In July, light sweet crude hit a peak of $78,40 per barrel in New York. In August, Brent North Sea crude reached an all-time high of $78,64 per barrel in London.
These levels put oil prices 20 dollars higher compared with the start of 2006 and four times higher compared with 2002.
However they have since dived owing to high levels of US energy inventories and mild temperatures in the United States, while traders are beginning to overlook unrest in oil producing countries such as Nigeria and Iran.
Meanwhile with producers — Opec and non-Opec members — pumping at full capacity, even minor output trouble would have pushed prices disproportionately upwards earlier in the year.
But as Lehman Brothers analyst Ed Morse pointed out: ”Nothing that could have gone wrong in 2006 went wrong.” For example, Iran was not hit by economic sanctions and the hurricane season was calm.
Global Insight’s Wardell added: ”At its peak when we were at 78 [dollars], I suppose you could say it [the geopolitical fear] was adding $25 to $30 a barrel.
”It’s come down to around $15 now.”
Wardell said that prices were now trading towards a range that was more reflective of the true state of demand and supply, which he put at between $55 and $60 per barrel.
In 2007, he forecast that ”prices will probably rise further from where they are over the winter and then begin to dip through the year as supply meets demand”.
In 2005, crude prices had raced ahead owing to strong demand in China and the United States, as well as lower production caused by hurricane damage to oil installations in the Gulf of Mexico. – Sapa-AFP