New Delhi: For all those rejoicing at the prospects of the Saudis propping up crude oil supply, cease! Citigroup Inc has raised its oil price estimates for the next two years to $105 from around $90 earlier. The analysts have cited a fall in spare capacity and reduced sensitivity of demand towards price increases (to an extent).
Mark C Fletcher and his team note:
A reduced capacity cushion and the fear that spare capacity dips below 4% of the market maintains the oil price at $100 into 2012, we believe. We assume that oil prices around $100/barrel with forays towards $120 do minimal damage to demand.
They reckon that not only are hopes of excess capacity exaggerated, it is overtly concentrated in one country -Saudi Arabia.
The real spare capacity is held in the Middle East. Saudi Arabia is the custodian of nearly 70% of OPEC’s (and de facto the market’s) spare capacity…Spare capacity is concentrated in a few hands within OPEC and its supply relies on Saudi Arabia’s ability to respond effectively.
This reliance on one country is making them restless. OPEC’s spare capacity claim of 5.2 million barrels per day is based on the assumption that Saudi Arabia can boost its produce to 12.5 million barrels per day. The folks at Citi are not buying this noting:
Saudi Arabia has not managed to produce more than 10Mbd in recent years and the market cannot be sure of claimed productive capacity until it is tested... Grade quality and the ability of the market to manage quality substitution is also an issue which may cause logistical dislocation and therefore price issues.
Thus, they conclude that crude prices will continue to hover around $105 a barrel in 2011 as fear of supply disruption will make buyers wary. This rise in fear factor will keep buyers on tenterhooks and eventually make them pay risk premium.
In other words, more bad news for India and they government with its rosy pictures of curtailing spending the next fiscal.