Mikaila Adams
Editor, The Financial Update

Saudi Arabia, the world's largest oil exporter, will increase production 300,000 barrels a day next month after customers requested more oil. According to OPEC, however, that won't subdue prices being driven ever-higher by a weak US dollar.

Crude oil for June delivery rose as much as $1.48 a barrel, or 1.2%, to $127.77 a barrel on the New York Mercantile Exchange. It traded at $126.89 at 1:51 p.m. in London. The contract gained $2.17, or 1.7%, to $126.29 on May 16, the highest close since futures trading began in 1983.

Despite demand not having the most forceful impact on prices, it is predicted to contribute going forward.

One such instance comes from recovery efforts in the wake of the May 12 earthquake in China's Sichuan province. Demand for petroleum fuels for construction and transportation could raise the International Energy Agency's estimate that the country's oil demand growth from 2007 to 2008 would be roughly 350,000 b/d on a base of 7.54 million b/d.

The southwest Sichuan province is China's main gas producer and consumer, accounting for a quarter of China's total gas production. PetroChina, the primary operator, said it has restored a third of the daily output of 6 million cu m of gas that was shut in after the quake.

Sinopec's giant Chuanxi gas field in the Sichuan province was reported running at 20% of capacity after many chemical plants closed, up from only 10% earlier when 1,000 gas wells were shut in. As of May 15, the field was reported to be producing 1.6 million cu m/day.

For the short term, Goldman Sachs predicts an average oil price forecast for the second half of 2008 of $141 a barrel citing global GDP growth outstripping production increases, leading to higher long-dated future contracts.

Long term predictions by Goldman Sachs put crude prices escalating to $150-200/bbl within two years. While these prices just six months ago may have seemed absurd, keep in mind that the investment bank was one of the first to predict $100 a barrel oil prices back in 2005.

Iran's Oil Minister Gholamhossein Nozari also believes $200 per barrel crude is possible if existing conditions in the market continued.

Nozari blames the weak US dollar and supply concerns from Nigeria, not supply and demand for oil's record high prices.

OPEC oil supply fell in April to 31.64 MMboe/d, its lowest this year, as a strike cut Nigerian output and top OPEC exporters Saudi Arabia and Iran trimmed production, a Reuters report recently showed.

Despite these forecasts, there are some industry executives who believe oil will fall below the $100 per barrel mark.

A survey conducted by KPMG LLP's Global Energy Institute revealed that many execs believe the price will drop significantly from the current high level by the end of the year.

The survey polled 372 financial executives from oil and gas companies in April 2008. Fifty-five percent of the respondents think that the price-per-barrel of crude oil will drop below $100 by the end of the year.

Twenty-one percent think that the price will close between $101 and $110; 15% think between $111 and $120; and 9% believe it will close at above $120. And, while 44% felt that prices would peak by the end of the year, a further 39% thought that they would not peak until after 2010.

Despite the fact that the majority of executives questioned expect the price of oil to fall below $100 a barrel, 44% plan to increase their upstream capital spending by more than 10% over the next year, an increase of 9% over last year. Twenty-six percent say that investment will increase by up to 10%. Only 5% anticipate a decrease in investment in the coming year.

In addition to increased investment domestically, given the state of the US economy, 46% expect that there will be more foreign investment in/acquisition of US energy companies in the coming year and 18% expect that it will increase significantly. Only 5% expect a drop.

When asked what would most enhance US energy security, respondents overwhelmingly felt that opening up drilling domestically is the best option. More specifically, 43% said that the Arctic National Wildlife Reserve should be opened for drilling and 28% cited opening up drilling in the Rocky Mountain region. A further 28% said that investment in renewable energy will enhance US energy security the most.

However, despite many oil and gas executives feeling that there should be more investment in renewable energy sources they still do not see it is a serious near-term solution in the energy supply equation.

Almost all of the respondents stated that they expect natural gas to become a larger contributor to global energy supply.

Fifty-four percent of respondents said that natural gas will grow significantly as a percentage of total energy supply and 37% said it will grow somewhat.

CRUDE OIL FACTS:
•Since 1998, crude oil prices have skyrocketed from $9.16/bbl to about $124/bbl today – that's an increase of more than 1,300%.
•Oil production in the US peaked about 1971.
•The US imports about 70% of its oil needs.
•The leading oil exporting countries are (in order): Saudi Arabia, Russia, Norway, Iran, and the United Arab Emirates.
•Saudi Arabia has said it will not increase production beyond investments already in place.
•2008 Russian oil production is forecasted to be below 2007 levels.
•These exporting countries are currently experiencing rapid growth and are consuming more oil domestically. Because of this growth, some industry experts predict these five countries will have zero oil to export by about 2030.
•In 2003, the Energy Information Administration predicted crude oil prices would hit a high of $24.68/bbl by 2020. They were a little off the mark.