Oil prices yesterday (Wednesday) rose $1.23, or 1.5%, to close at a two-month high of $82.93 on the New York Mercantile Exchange (NYMEX) after the Organization of Petroleum Exporting Countries opted to keep its production quotas in place.
However, it may not be much longer before prices take off again, possibly hitting $100 a barrel by the end of the year.
Current prices are "beautiful," Saudi Arabian Oil Minister Ali al-Naimi told reporters before OPEC's meeting.
"The producer is looking at this price, the consumer is looking at the price, the investor is looking at the price, and everybody is saying this is great," he said.
OPEC, which supplies about 40% of the world's oil, set its official cap at 24.845 million barrels per day (bpd) in December 2008 and has kept it there for five straight meetings. In that time oil prices have more than doubled.
The price of crude has traded between $70 a barrel and $83 a barrel since Dec. 15. But it may not be long before prices break out of that range.
"OPEC has obviously been quite happy with the current price range," Mike Wittner, head of oil research at Societe Generale SA (OTC: SCGLY), told Bloomberg. "Later this year, OPEC will have to think about whether they are comfortable with higher prices."
Morgan Stanley (NYSE: MS) analyst Hussein Allidina said earlier this year in a research note that prices will reach $95 a barrel by the end of the year, and average $100 a barrel in 2011. And Goldman Sachs Group Inc. (NYSE: GS) says oil prices will hit $96.50 a barrel within 12 months.
The longer-term picture is even more bullish. Societe Generale believes oil prices will average $104 a barrel in 2012 and Merrill Lynch sees prices returning to record high levels of $150 by 2014.
To justify these estimates analysts point to a global economic recovery that has proceeded faster than expected and growing demand in Asia and other emerging markets.
China will account for almost a third of global oil demand growth this year it predicts, according to the Energy Information Administration (EIA).
Noting that China's apparent demand for crude surged by an "astonishing" 28% year-over-year in January alone, the EIA for the second time this year has revised its global forecast upwards by 70,000 bpd to 86.6 million bpd. That would be a 1.8% increase from 2009 levels.
According to the EIA, "this year's global oil demand growth will be driven entirely by non-Organization for Economic Cooperation and Development (OECD) countries, with non-OECD Asia alone representing over half the growth."
The agency raised its 2010 demand forecast for China by 130,000 barrels per day to 9 million bpd, representing an increase of 6.2% from 2009.
Additionally, signs are beginning to emerge that demand in the United States – the world's largest oil consumer – is getting back on track.
Data released yesterday showed crude oil inventories rose by 1.1 million barrels last week, which was less than expected. There also was a 1.7 million-barrel drop in gasoline stocks and a 1.4 million-barrel drop in heating oil stocks.
In fact, U.S. gasoline demand and production last month broke records for a February, the American Petroleum Institute said in its latest monthly statistical report. Motor gasoline deliveries, which API uses to measure demand, increased 2.2% year-over-year to an average 9 million bpd, while finished gasoline production rose 0.4% to 8.8 million bpd.
"These numbers clearly show that the refining industry is making the gasoline consumers are demanding, and making it at record levels," said API Chief Economist John C. Felmy. "Production is keeping pace with demand, which appears driven in part by some brightness in the economic picture, even as imports fall."
And while U.S. manufacturing output fell in February, it rose outside of the auto sector, and mining activity posted a strong gain, leading overall industrial output to rise slightly. Also, factory employment, shipments and unfilled orders in New York state all rose this month.
"You're seeing a clear evidence of a V-shaped recovery in the manufacturing sector, partly because it shrank so rapidly during the recession but also, there's a lot of positive fundamentals," Zach Pandl, an economist at Nomura Securities International, told Reuters.
All of this is bullish for oil prices, but downside risk does remain.
Some analysts believe that oil prices could actually fall later in the year, as OPEC members abandon production quotas and demand plateaus.
Even OPEC figures show that adherence to the 4.2 million bpd production cut has dwindled to just 53% from a high of 80%.
"It's a problem," said Kuwaiti oil minister Sheikh Ahmad Abdullah al Sabah. "We'd like to see it in the 60s, at 65%."
Output among OPEC nations jumped to 26.811 million bpd, driven mostly by production increases in Iran, Angola, Nigeria and Venezuela.
"OPEC will have to show its mettle," Leo Drollas, deputy director of the CGES in London, which was founded by former Saudi oil minister Sheikh Zaki Yamani, told Bloomberg. "If they can't hold discipline, we're looking at prices going to $50 by 2015."
Complicating matters further is Iraq, which is a member of OPEC, has been exempt from oil production quotas as it rebuilds its political and economic infrastructure. But as it takes its place back among the world's top oil producers, the country will have to make the transition back into OPEC compliance.
The nation's oil exports reached their highest level in more than a year last month, surging 7.4% to 2.07 million bpd.
"Iraq doesn't have a formal quota and Nigeria is acting like it doesn't," said David Kirsch, director of oil markets at PFC Energy. "The potential of Iraq to substantially increase its production over the next few years has really changed the supply dynamic."
Iraq offers the world's third-largest oil reserves with about 115 billion barrels of black gold bubbling within its borders. And many analysts believe Iraq will soon leapfrog Iran, which has about 137 billion barrels of proven reserves.
While the country boasts proven petroleum reserves of 115 billion barrels, the EIA estimates that up to 90% of the country remains unexplored. Only 2,000 wells have been drilled in Iraq, versus approximately 1 million in the state of Texas alone. Iraq could easily have another 100 billion barrels of oil buried beneath its uncharted territories.
Indeed, the nation that currently produces just 2.5 million barrels of oil a day hopes to be pumping 12 million barrels daily within the next few years, said Hussein al-Shaharistani, Iraq's oil minister.
"On the supply side, Iraq overwhelms everything else," Edward Morse, head of commodities research at Credit Suisse Group AG, told Bloomberg
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