Oil above US$55 a barrel? No problem, and readily explainable by the
numbers. Unless you’re an oil producer the numbers don’t look
encouraging in the medium term with higher prices set to rule. Global
demand is soaring and global refining capacity has lagged demand
growth. For instance, over a 100 refineries have closed for
environmental reasons in the US over the past 20-30 years. Increases in
refining capacity in the US have been re-builds and greenfield
expansions to meet tightening environmental restrictions.

OPEC
recently announced that it would increase its production quota by
500,000 barrels per day, and had another 1.5 million barrels per day
that could be made available to the market to help bring the price
under control. It’s becoming more obvious by the day that OPEC is
increasingly unable to control the price of crude oil. Why is this so?
It seems it’s not just Australia that suffers shortage on basic
infrastructure: one or more large refineries need to be commissioned
every year in China, India or elsewhere just to meet the projected
annual growth in China’s imports of crude oil.

And what about
all the other emerging economies? We don’t even have to discuss these
to figure out how tight supply is and how it will likely to remain so
for the short- to medium-term. Moreover, don’t forget that US demand
will continue to grow, albeit at a relatively slow pace, as the hike in
price of petrol in the US has so far failed to curtail demand. More here.

Peter Fray

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