Moody's Investment Oil Price Outlook

Aug 9, 2011

From Moody’s:

A significant increase in Saudi Arabian oil production has kept global oil prices in check. Saudi Arabia has boosted production by about 1 million barrels per day, replacing about 70% of the daily oil production lost in the Libyan civil war. Recent reports on U.S. crude inventories indicate that more Saudi oil is finding its way to U.S. shores. But Saudi Arabia took some time to ramp up production; the kingdom has produced only an extra 60 million barrels since hiking production in May. About 210 million barrels of Libyan oil have been lost because of the fighting, greater than the combined amount of oil released by International Energy Agency countries and the extra Saudi production. Higher Saudi production is essential to keeping global crude oil inventories from declining as petroleum demand in the Northern Hemisphere hits a crescendo. Only Saudi Arabia is capable of compensating for the Libyan shortfall in oil production.

The increase in Saudi production has trimmed global spare capacity, deflating the cushion that the world’s oil producers have to respond to further supply shocks. Effective spare capacity is now only 3.2 million barrels per day, which is only 3.6% of global oil demand. The last time spare capacity as a percentage of oil demand was so low was in 2008 when WTI futures spiked to $147 per barrel.

Crude oil is expected rise in the second half of the year, eclipsing the psychologically important barrier of $100 per barrel. The price increase will be underpinned by stronger global economic growth at a time when petroleum supply remains constrained by a protracted civil war in Libya. The price increase will slow, but not arrest the global expansion. No new supply disruptions in the Middle East and North Africa are expected to occur, although Libyan output will remain below its prewar level until at least 2013. Libyan oil production had been expected to fully recover at the end of 2012 just two months ago.

Oil prices will trend even higher in 2012 and 2013, powered by robust demand from Brazil, Russia, India and China. The Chinese economy is expected to avoid a hard landing, and rising resource utilization in the U.S. will bolster petroleum demand. OPEC excess capacity will decline in 2012 before Libyan oil production is restored. Non-OPEC oil production will increase gradually, as new fields in Africa and South America more than offset the ongoing decline in traditional oil fields in the North Sea and Mexico.