Global Investment House –GCC Oil Sector Report- Oil prices, which started to drop from the fourth quarter of 2006 and reached a low of US$49.0/b in Jan-07. This can be attributed to the widening of demand supply gap as well as easing of geopolitical tensions in the region. Once again, the situation in Iran changed the apple-cart, which saw oil prices climbing back to the US$60/b mark in the first three months of 2007. Average Brent for 2006 was US$64.8/b higher by 19.7% from the previous year. Going forward, we expect oil prices to remain in the same range of US$55-65/b during the year 2007, which will result in high surplus, thus resulting in another excellent year for GCC economies.
The world oil demand in 2007 is expected to grow by 1.5% or 1.2 mb/d to reach 85.37 mb/d. On a regional basis, China and the Middle East are expected to contribute the most to the rise in demand with an estimated growth of 0.6mb/d and 0.35mb/d respectively. The world oil demand was 84.13 mb/d in 2006, an increase of 0.8 mb/d or 1.0%. The demand in 2006 was impacted by the warm weather at the end of 2006.
OPEC crude oil production in 2006 was 30.9 mb/d, a drop of 0.2 mb/d from the previous year. Third quarter of 2006 recorded the highest production as the average supply reached 31.1 mb/d. However, there was a further decline of supply in January 2007 to reach 29.97 mb/d, which is 0.27 mb/d lower as compared to the previous month. Non-OPEC oil supply have increased by 0.54 mb/d in 2006 to reach 49.47 mb/d in 2006 as compared to the previous year. In 2006 the highest supply came from North America with 14.26 mb/d followed by the Former Soviet Union (FSU) region with 12.2 mb/d. According to the latest report from OPEC, the non-OPEC supply is estimated to grow by 1.2 mb/d in the year 2007.
In addition, there are concerns that strong global demand for oil could outpace supply as till now even though supply had surged in the face of the clamor for more oil, it was only just keeping pace with demand. The demand growth is expected from the largest importers of oil such as US and developing Asian countries like China and India. We believe that strong global demand, concerns about limited excess production capacity and fears of unplanned supply disruptions have kept prices high in recent months. This rising trend might affect the economic growth worldwide. Going forward, we believe that the situation in Iran will ease up, which will bring back the oil prices at around the US$55/b mark (average).
High oil prices prevailing in the market will provide all the GCC economies with huge trade and current account surpluses. As a result of these huge surpluses, GCC will continue to invest in large infrastructure projects. GCC countries are also focusing on expanding their oil production and refineries, which they want to implement through allowing foreign investments in the region. This step by the GCC countries will only improve the hydrocarbon sector and bring in new international players in the sector.
Besides the buoyant oil scenario, what enhances our expectations for the medium term are the multiplier effects of projects in pipeline, which are likely to attract huge investments from the West. However, the best of times are here to remain for at least some more years as portended by the global oil demand forecasts. It is also believed that oil price anywhere above US$40/b is bound to ensure adequate liquidity in the GCC countries.
On the same lines, the liquidity powered by oil prices and steady production led to high growth of the GCC economy. Although, the heavy dependence on oil in the GCC countries continues to remain a concern especially when considering the sustainability of this growth in the longer term. Going forward, we believe that the oil prices will remain high but not quite at the lofty levels that were seen in the last couple years. Going forward, we believe that the oil prices would remain in the vicinity of US$55-65/b during 2007, which implies another excellent year for GCC economies.