Bloomberg News

Oil May Beat Expectations on OPEC Subsidies, Deutsche Bank Says

February 03, 2012

Feb. 2 (Bloomberg) -- Crude oil prices may rise faster than expected because surging domestic demand in OPEC nations, boosted by subsidies, will soak up supply, according to Deutsche Bank AG.

Last month, Nigerian President Goodluck Jonathan’s decision to remove fuel subsidies triggered violent protests, and a week- long strike by labor unions, highlighting the difficulty of cutting allowances for other nations in the Organization of Petroleum Exporting Countries, said Mark Lewis, a Paris-based managing director at the bank.

A failure to cut subsidies may lead to a faster increase in crude prices than currently reflected in the market, he said today in a telephone interview. “You’ve got a greater demand for a declining pool of crude,” he said. Lewis declined to forecast by how much prices would probably beat estimates by other analysts.

Brent crude oil prices have jumped 91 percent in the past five years. Demand in Saudi Arabia, with a population of about 26 million, rose by 1.2 million barrels a day in the decade through 2010, according to Lewis’s analysis. That’s more than the 1.1 million-barrel advance in India, with 1.2 billion people. Front-month Brent rose 1 cent today to $111.59 a barrel on the ICE Futures Europe exchange in London as of 1:21 p.m.

Direct subsidies on crude oil in the world amounted to $192 billion in 2010, more than 70 percent of which was in major exporting nations, the report said, citing IEA data.

The International Energy Agency assumes nominal crude prices may reach $247 a barrel by 2035, almost twice the $133 expected by OPEC, even as forecasts for demand converge, according to documents prepared by the Riyadh-based International Energy Forum before a meeting of the IEA and OPEC last month in the Saudi capital.

‘Frustrated Demand’

“The rise in real oil prices since 2005 mainly reflects frustrated demand,” Lewis said today. “Subsidies on domestic oil consumption have been instrumental in driving a very material increase in domestic demand within OPEC and other oil- exporting countries over the last decade,” he said.

The continuing increase in domestic consumption in exporting countries explains why global exports of crude have been on a “downward trajectory” since 2005, the report said.

Demand is frustrated because even though supply of oil is apparently sufficient, high prices are discouraging consumption, Lewis said. Some importing nations also introduced climate- protection measures to curb oil demand and boost other fuels with lower energy density, such as natural gas liquids and biofuels, according to Lewis.

--Editors: Alessandro Vitelli, Matthew Brown

To contact the reporters on this story: Sherry Su in London at lsu23@bloomberg.net; Mathew Carr in London at m.carr@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net


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