World oil demand needs Saudi supply…

Opec ministers say they will almost certainly leave their oil-production ceiling unchanged when the group meets this week. What really matters for markets is whether Saudi Arabia will respond to global supply shortfalls by pumping a record amount of crude. Just six months ago, energy analysts predicted output from the Organisation of Petroleum Exporting Countries would climb too high and Saudi Arabia needed to cut to make room for other suppliers. They changed their minds after production from Libya, Iran and Iraq failed to rebound as anticipated, and industrialised nations’ stockpiles fell to the lowest for the time of year since 2008. Saudi Arabia may need to pump a record 11mn barrels a day by December to cover the other member nations, says Energy Aspects Ltd, a consultant.

“Now it’s not whether the Saudis will make room, but whether they’ll keep it going and maintain enough spare capacity,” said Jamie Webster, a Washington-based analyst at IHS Inc, an industry researcher. “Opec is increasingly having a hard time just doing its job of bringing all the barrels needed.” Even as the North American shale revolution propels US production to a three-decade peak, supply in other parts of the world is faltering. A battle for political control in Libya, pipeline attacks in Iraq and prolonged sanctions against Iran are preventing those nations from reviving output. While US crude inventories rose to a record in April, restrictions on exports are keeping those supplies in the country, tempering forecasts that global oil prices will decline this year.

Deutsche Bank AG, Morgan Stanley, Barclays Plc and Citigroup Inc raised their 2014 Brent price forecasts over the past three months, citing supply risks. The median estimate of the four banks climbed to $107.75 a barrel, from $100.25 as of December 31. The grade has averaged $108.25 a barrel this year, compared with $108.70 in 2013. It rose 0.6% to $109.25 a barrel as of 12:28 pm in London.

Opec, which produces about 40% of the world’s oil, will meet in Vienna on June 11 to discuss its 30mn-barrel daily output target. Ministers from Saudi Arabia, Angola and Kuwait said they expect no change, as did 22 of 23 analysts and traders surveyed by Bloomberg News.

Opec’s Economic Commission Board, a panel that reviews supply and demand levels before the meeting, concluded on June 5 that the current production level is adequate, according to two Opec delegates. The International Energy Agency, the Paris-based adviser to 29 nations, recommended on May 15 a “significant rise in Opec production” to meet demand of 30.7mn barrels a day in the second half of the year. Oil inventories in advanced nations were at 2.62bn barrels in April, the lowest for that month since 2008, the year Brent reached a record $147.50 a barrel, IEA data show.

Boosting output that high would be “a Herculean task for the group to surmount given that production has been below 30mn barrels a day for the last five months,” London-based Energy Aspects said in a May 27 research note. The situation has reversed since Opec last met in December. At that time, the IEA indicated the group would need to reduce output by about 3% in the first half of 2014 to make way for North America’s booming shale oil supplies. US oil production rose to 8.47mn barrels a day in the week ended May 23, the highest since 1986, according to the Energy Information Administration.

The nation’s crude inventories were at 399.4mn barrels through April 25, the highest in weekly data beginning in 1982, the EIA estimates. Several Opec nations have failed to boost output as their ministers suggested at the group’s last meeting in December. Iraq was aiming for a surge of about 30% in 2014 to 4mn barrels a day, Oil Minister Abdul Kareem al-Luaibi said.

Libya intended to restore within 10 days full daily capacity of almost 1.6mn barrels, from less than 20% previously, Oil Minister Abdulbari al-Arusi said. Iran had secured six months of relief from sanctions imposed by western governments and was seeking its highest output in five years, Oil Minister Bijan Namdar Zanganeh said. Iraq’s daily production contracted 8% since reaching a 35-year peak of 3.6mn barrels in February amid political disputes and pipeline bombings, according to the IEA.

In Libya, output has fallen to a 10th of capacity because of protests at oil fields and strikes at export terminals. Iranian supply is little changed, while an end to sanctions relief looms in July if it cannot reach a broader deal on its nuclear programme.