IFP develops three oil price scenarios for 2004-05

Faced with lofty world crude oil prices, reflecting a perception of tight fundamentals and threats to supplies, Paris-based Institut Français du Pétrole recently examined how the situation might evolve over the next 18 months.

These higher oil prices also have sparked the first signs of inflation in oil-importing countries within the Organization for Economic Cooperation and Development, IFP observed.

The decisive factors influencing prices, noted IFP, are growth in demand, the rate of utilization of production and refining capacities, and outside factors such as geopolitics, winter weather conditions in the Northern Hemisphere, and hurricane development in the Gulf of Mexico.

Whatever the scenario, however, production from nonmembers of the Organization of Petroleum Exporting Countries should maintain a global increase of 1 million b/d/year in 2004 and 2005 to a level of 50-51 million b/d, IFP said.

Price scenarios

IFP has forecast three scenarios to yearend 2005 by taking into account the dominant market features: continuation of the current trend, with sustained demand in a relaxed geopolitical context; a new "oil crisis" scenario, with a significant and lasting interruption of exports from a large oil producing country; and a "soft landing" scenario, where oil demand slows down strongly because of the delayed impact of high energy prices on the economy.

The first reference scenario is a continuation of the current trend—the situation in Venezuela becomes stable, Iraq maintains an export volume at least equal to that of early 2004, the OAO Yukos crisis is resolved, Russia's export volumes are not affected, the internal situation in Saudi Arabia remains stable, and conditions are normal during the 2004-05 winter season in the US and Europe.

Under this scenario, stocks on the US natural gas market are sufficiently high to keep gas prices below $6/MMbtu; world oil demand remains high (at around 1.5 million b/d), but is lower than in 2004, reflecting the first reactions to the high oil prices over the last 18 months; and peak consumption of oil during the winter months hovers at 82-83 million b/d.

Also under this price scenario, OPEC capacities would remain saturated and would not allow for a stock rebuild of crude and products beyond the averages of the previous 4-5 years. The market would remain nervously expectant of untoward events.

The crisis scenario would be sparked by the destabilization of one of the larger oil exporting countries, with a lasting effect on volumes exported. Fallout from this scenario include: supply is unable to satisfy demand during the winter peak period, oil stocks in large consuming countries fall to their lowest level ever, and despite concerted use of strategic stocks, the price of oil reaches that of the 1979-82 oil crisis ($80/bbl in 2003 dollars).

Also under this case, several economic sectors—including air and land transportation, agriculture, and chemicals—would be affected by violently rising production costs. Also, the price of oil would spread to other energy markets and generate a self-feeding volatility, and inflation would be multiplied by at least a factor of two. In this case, world economic growth would be affected immediately.

The soft-landing scenario implies that nothing comes to perturb oil production and exports. China's energy needs would slow down through a number of internal factors: consumption price liberalization, logistical bottlenecks, interruption of stockbuild policy, and drastic energy-saving measures.

Meanwhile, in the US, oil demand would stagnate on the back of a delayed reaction to recent high oil prices. Other Western and Asian countries would be similarly affected. World oil demand growth would hovers around 1 million b/d/year and oil prices would fall to about $30/bbl as OPEC renews stocks with excess capacity.

IFP concluded that, considering oil markets are influenced by a large number of factors and can switch rapidly from abundance to shortage, what happens to world oil markets through yearend 2005 might well be a mix of these three scenarios.