Focus shifts to non-Opec countries

Are publicly quoted oil prices confirming that the world's economic centre of gravity is rapidly shifting from west to east?

In SA and in most of the world from Europe to China, the focus of attention is generally on Brent crude, the price set by traders in London. In the US, it's West Texas intermediate (WTI), quoted on Nymex (New York Mercantile Exchange).

But while Brent has slipped fractionally from its $127 a barrel (bbl) high in April to its current $116, WTI has essentially crashed from its April high of $115 to its current $83/bbl. And many traders and economists have been arguing for months that the widening disparity means WTI prices are no longer a reliable gauge of the global economy.

Certainly, Brent has come off its peak. But its market reflects a host of factors - everything from production disruptions in Libya and Nigeria, soaring demand from the booming economies of China and India, Iraq's tardiness in exploiting its enormous reserves, a soggy European economy and even piracy off Somalia.

Though the US is a net importer of oil, its market is a law unto itself. WTI prices are based on supply and demand in the town of Cushing, Oklahoma, in the centre of the country. Storage tanks in Cushing are threatened with overflowing, with crude flooding in from Canada and new oil and gas fields in North Dakota, set against insufficient pipeline capacity to move crude easily around the lower 48 states.

And though US automotive demand for petrol and diesel has been rising for years, there has been the offset of weakening industrial demand as the nation's manufacturing capacity has steadily moved offshore. In other words, the standard American price is dominated by local conditions and, largely, by local conditions alone.

Then there's natural gas. Gas produced from conventional wells and, increasingly, by "fracking" shale, is transforming America's energy balance. Fracking has been halted in, for example, northern France, and proposals for it are being vigorously opposed in an oil-poor South Africa. Not so in the US.

Spot gas prices at the Henry Hub in Louisiana have overall been stagnating for the best part of a year. There, the price of one million British thermal units (mmBtu) is currently a tad below $4 after a year's low of $3.70 in March and the June peak of $4.92. Demand for gas to generate electricity has been rising, only to be counteracted by weakening industrial demand for similar reasons to that of oil.

The US government's Energy Information Administration (EIA) estimates domestic gas production will average a daily 65 billion cubic feet (bncf) this year, a rise of 5.9% on 2010, to be followed by a 0.9% rise next year. But, the EIA reckons, domestic demand will only increase by 1.8% this year to a daily 67 bncf. Industrial demand, expected to rise by 1.7%, depends on relatively strong growth in the sluggish US economy.

In contrast to that of the US, the EIA now estimates that growth in global oil demand, led by China, will outpace that of the OECD countries. The world's consumption of oil and liquid fuels reached an all-time high of 86.8million barrels a day in 2010, with an additional 1.4million bbl/day slated for this year and 1.6million next year. That compares with the average annual increase of only 1.3million bbl/d in the 10 years leading up to the 2008 financial crisis.

And those demand increases will come from the non-OECD nations, with China accounting for half of the totals. Opec countries, led by Saudi Arabia, can lift more crude, but the future of supply increases looks set to be met by developing and established non-Opec producers.

The fact that the need to produce from non-Opec countries is urgent helps explain why Exxon this past week traded a share in its US wells and refineries with Russia's largest oil company, Rosneft, for the right to explore for oil in Russia's technically challenging Arctic.

Let's overlook China's scramble for Africa's oil. The entire world's non-Opec needs also help explain why France's Total is targeting Africa for 30%, or $5-billion, of its annual new capital investment in greenfields exploration and development towards Africa. That's offshore Angola (which is Total's fourth-largest source of oil) and onshore in newly prospective areas of Southern Sudan, Uganda, Tanzania and the DRC as well as in the more-traditional oil regions of west Africa and the Maghreb.

As Total's chief executive Christophe de Margerie never tires of saying: "Africa is the major (oil) development continent in the short and medium terms."