Oil 2004-2008 - Rising Prices
Annual Energy Outlook 2005 (AEO2005) was based on Federal and State laws and regulations in effect on October 31, 2004. The potential impacts of pending or proposed legislation, regulations, and standards - or of sections of legislation that have been enacted but that require funds or implementing regulations that have not been provided or specified-are not reflected in the projections. AEO2005 was released on the EIA website on February 11, 2005.
In the AEO2005 reference case, the annual average world oil price increase from $27.73 per barrel (2003 dollars) in 2003 ($4.64 per million Btu) to $35.00 per barrel in 2004 ($5.86 per million Btu) and then decline to $25.00 per barrel in 2010 ($4.18 per million Btu) as new supplies enter the market. It then rises slowly to $30.31 per barrel in 2025 ($5.07 per million Btu). As recently as April 13, 2005 Guy F. Caruso, Administrator of the Energy Information Administration, was briefing these results.
But The EIA's Short-Term Energy Outlook - April 2005, released 07 April 2005, told a very different story. During the first quarter of 2005, West Texas Intermediate (WTI) crude oil near-month contract futures prices averaged $49.77 per barrel, rising nearly $14 per barrel over the 3-month period. Higher crude oil prices over this period reflected, in part, market expectations of robust world demand, limited increases in non-Organization of Petroleum Exporting Countries (OPEC) production, and uncertainty about crude oil supplies from continuing volatile situations in Iraq, Nigeria, and Venezuela. Traders and oil market analysts seemed focused on the latter part of 2005, projecting continued strong demand growth with very little spare production capacity available.
The average West Texas Intermediate (WTI) crude oil price for the first quarter of 2005 was $49.77 per barrel, approximately $14.50 per barrel higher than in the first quarter of 2004 and $1.10 per barrel above the first quarter 2005 projection in the previous Outlook. WTI prices were projected to remain above $50 per barrel for the rest of 2005 and 2006. Oil prices are likely to be sensitive to any incremental oil market tightness. Imbalances (real or perceived) in light product markets could cause light crude oil prices to increase to levels above the $55 per barrel average projected in the Outlook.
Several factors contributed to the high crude oil prices. First, worldwide petroleum demand growth is projected to remain robust, despite high oil prices, but is likely to moderate in response to slower Chinese growth, which exceeded 1 million barrels per day in 2004. Projections for 2005 and 2006 called for worldwide growth averaging 2.2 million barrels per day, or 2.6 percent, per year, down from the 3.4-percent growth in 2004. Chinese demand growth is projected to moderate to an average of 650 thousand barrels per day annually in 2005 and 2006.
Second, expected growth in non-Organization of Petroleum Exporting Countries (OPEC) supplies was not expected to accommodate worldwide demand growth. Third, worldwide spare crude oil production capacity has recently diminished and is projected to remain low. Fourth, freight rates, although down from those in 2004, are projected to remain high in historical terms. Finally, geo-political risks, such as the continued insurgency in Iraq and political unrest in Nigeria and Venezuela, were expected to keep the uncertainty premium high. EIA's assessment of the outlook through the balance of 2005 expected markets to remain relatively tight.
The EIA's "International Energy Outlook 2005" was released in July 2005. It projected that, from anticipated high levels throughout 2005, world oil prices decline gradually through 2010 to $31 per barrel (in 2003 dollars). World oil prices rose by more than $9 per barrel (in nominal dollars) over the course of 2004 and were expected to add an additional $11 per barrel in 2005, brought about by tight oil market conditions that include low inventory levels, surging demand in emerging Asia, and the situation in Iraq; however, such developments are not indicative of the long-term trend in the IEO2005 reference case.
On 09 August 2005, New York's main contract, light sweet crude for delivery in September 2005, climbed 54 cents to $63.61 per barrel in electronic trading. The contract had struck $64.27 late on 08 August 2005, the highest level since it was first traded in 1983. In contrast to most other oil-price-spike episodes, this time the far futures price of oil -- that is, the price for contracts seven years out -- had also risen sharply. This correlation seemed to indicate that the oil price increase was not viewed as a purely temporary shock.
Crude oil prices increased dramatically during 2007, with West Texas Intermediate (WTI) prices climbing from an average of nearly $55 per barrel in January 2007 to over $95 per barrel in early November 2007. A variety of supply and demand fundamentals, including strong world economic growth driving growth in oil use, moderate non-Organization of the Petroleum Exporting Countries (OPEC) supply growth, OPEC members' production decisions, low OPEC spare production capacity, tightness in global commercial inventories, worldwide refining bottlenecks, and ongoing geopolitical risks and concerns about supply availability, have been drivers in oil price movements over the year. The decline in the value of the dollar against other currencies supports continued oil consumption growth in foreign countries because oil is traded globally in dollars, and a declining dollar has made the increase in oil prices less severe in foreign currencies.
The US Energy Information Administration Short-Term Energy Outlook released on 06 November 2007 predicted that the price of oil imported into the United States would peak at $83.25 per barrel in November 2007, and decline to $69 per barrel by the end of 2008. The Annual Energy Outlook 2007, released by the US Energy Information Administration in February 2007, predicted that crude oil prices would fall to less than $50 per barrel [in constant 2005 dollars] by 2013, before nearly $60 per barrel [in constant 2005 dollars] by the year 2030.
In the first half of the 2008 oil rose from below $100, in part because of perceptions of tenuous supply in several of the major exporting countries. On Wednesday 02 January 2008 oil prices briefly reached $100 per barrel for the first time. The price of crude oil hit another record high 22 May 2008 of more than $135 a barrel, fueled by worries about supplies and growing demand. This was the second day in a row crude oil prices soared to new highs in trading in New York. The price of crude oil came close to $134 (133.82) the previous day. Oil prices had been buoyed by fears about production shortages around the world. And there are indications those shortages could becomes more severe. The spot price of West Texas Intermediate (WTI) crude oil increased from $122 per barrel on 04 June 2008 to $145 per barrel on July 3 and then to its peak of $147. By August 5, the price fell back to less than $120 per barrel. Since then the price of oil has continued to move back down towards the $100 level. By September 2008 the oil price fell back to below $110. Even some of the more hawkish OPEC leaders are saying that perhaps $100 a barrel is the 'right' price. WTI prices, which averaged $72 per barrel in 2007, were projected to average $119 per barrel in 2008 and $124 per barrel in 2009.
With world supplies dwindling, oil prices were predicted to rise as high as $200 a barrel. The continuing rise of oil prices on the world market is affecting everything from transportation to agriculture and manufacturing. In the United States, some politicians are blaming big oil companies for the problem, but, energy experts say national leaders need to confront the realities of growing demand and limited supply. Demand for oil is being primarily driven by expanding economies in China, India and other developing countries where fuel is needed for factories and transport. At the same time, a growing middle class in those nations is increasing the demand for automobiles, which, in turn, use more fuel. Some energy sector analysts say oil could go as high as $150 or even $200 a barrel in the coming decade, bringing on an age of fuel rationing and a deep economic downturn.
As of August 2008 EIA's assessment was that prospects for improved oil market fundamentals over the next 18 months pointed to an easing in the market balance and price weakness over the near term. The combination of slower U.S. and global oil consumption growth, increased production capacity for crude oil and natural gas liquids in the Organization of the Petroleum Exporting Countries (OPEC) beginning in the third quarter 2008 and continuing through 2009, and higher non-OPEC supply, raises the prospect for a drop in demand for OPEC crude oil and an increase in surplus capacity.
Downward price pressures would increase if the economic slowdown proves deeper or longer than expected, and if higher prices lead to lower consumption and lower demand for OPEC crude than currently anticipated. There is also a risk that any weakness in oil prices could be minimal or short-lived, especially if consumption growth exceeds current expectations or if oil production capacity expansion plans in either OPEC or non-OPEC nations turn out to be lower than expected. Supply risks in Iraq, Nigeria, and Iran, as well as threats of hurricanes over the near term, continue to influence market expectations. In addition, OPEC production behavior that would lead to voluntary production cuts aimed at keeping inventories fairly tight would also limit downward price pressure.
Oil prices closed on 16 October 2008 at a new 14-month low, less than $70 a barrel, less than half its July 2008 record high. Oil prices fell below $100 a barrel, Tuesday 09 September 2008, for the first time since April 2008. The Organization of the Petroleum Exporting Countries agreed to a modest production cut of 500,000 barrels a day, during a meeting in Vienna. In a marathon meeting lasting until early Wednesday, ministers from OPEC's 13 member states agreed to produce a limit of 28.8 million barrels a day.
Oil prices had rebounded on 23 October 2008 as investors anticipate the world's major oil producing nations would announce a production cut. Trading for light sweet crude for December delivery rose to $67 a barrel on the New York Mercantile Exchange in Singapore. The contract fell to $66 a barrel on 22 October 2008, its lowest level in 16 months. In London, the price of Brent crude oil for December rose to nearly $65 a barrel. OPEC President Chakib Khelil has said the ideal price for a barrel of oil would be between $70 and $90 a barrel.
Oil prices fell to less than $62 a barrel Monday 27 October 2008 amid continuing concerns about a global economic recession. U.S. light crude hit a 17-month low at $61.30, while London's Brent crude dipped below $60 a barrel. Oil prices fell even though OPEC (the Organization of Petroleum Exporting Countries) members said last Friday they would cut production by more than five percent (1.5 million barrels per day). OPEC produces about two-fifths of the world's oil.
Crude oil dropped below $59 a barrel in New York trading Tuesday 11 November 2008 on continued bad economic news in the United States, the world's largest energy consumer, and fears of a global recession. The price of a barrel of crude oil for future delivery declined $3.40 cents to $59.1 on the New York Mercantile Exchange. Futures touched $58.32, the lowest price since March 2007. Oil prices are down 60 percent since hitting an all-time high in July. They were also off about one-third from this time last year.
The International Energy Agency predicted oil prices would climb substantially over the next 20 years, despite current trends. In a report issued 12 November 2008 the executive director of the IEA, Nobuo Tanaka, said "the era of cheap oil is over." The agency predicts the price of oil will average about $100 per barrel over the next seven years. OPEC president Chakib Khelil said the ideal price of oil should be between $70 and $90 per barrel. Petroleum analyst Mike Ala of the Imperial College London, said on 12 December 2008 the price will rise, maybe into the $70 range - mainly because of seasonal demand for fuel in winter in the northern hemisphere.
By 05 December 2008 the price of crude oil had declined another 25 percent, to $40.81 a barrel, the biggest weekly plunge since the Persian Gulf War in 1991. On 21 November 2008 crude oil fell to lowest level in more than three years - below $50 a barrel. Light, sweet crude for December delivery dropped $4 to $49.62 a barrel on the New York Mercantile Exchange. Price slid to as low as $48.64 a barrel, the lowest level last seen in May 2005. Some estimate the average price of oil will drop to $40 a barrel in 2009.
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