LIBYA - The Global Petroleum Perspective.

There are further indications that front-month Brent could surge above $90/b later this year because of tropical storms, rising US demand for gasoline and disruptions in crude oil supplies from Nigeria and the Middle East. US-Iran tensions over Tehran's nuclear and regional ambitions are a primary factor. In June they coincided with week-long US-Israeli air exercises in Israel's Negev desert, with media hints the purpose was hitting Iran.

US government weather forecaster NOAA in May predicted 13-17 named storms in the Atlantic this year, saying 7-10 will become hurricanes and 3-5 to be category 3 or stronger. There is also tension between Syria and Israel over violent events in Lebanon and Iraq. Complicating the situation is a build-up of Turkish forces on Iraq's northern border following PKK attacks, with the US putting pressure of Ankara not to start a war.

By early June, open interest on options by buy December WTI futures at $90/b had doubled to more than 43,000 lots in two months. The probability that the December WTI contract will exceed $90/b when it expires on Nov. 16 had nearly doubled to just over 8% since January. This is according to a Deutsche Bank price model based on trading in options. Over the same period, the likelihood of December 2008 WTI futures exceeding $90/b at expiry had doubled to 16%.

The IEA on June 12 warned that world oil demand risked out-stripping OPEC's ability to boost its output, a situation made worse by production growth from non-OPEC suppliers falling below the psychologically significant 1m b/d this year. As OPEC digs deeper into its production capacity to meet strong demand ahead of winter, crude oil and fuel inventories are set to switch from a small surplus into a deficit in the July-September quarter, when inventories held by OECD countries could fall by as much as 1.5m b/d.

With its latest data, the IEA revised the rise in world oil demand significantly higher, with year-on-year demand growth now seen at 2% at 86.13m b/d in 2007, from 1.8% it foresaw in its May. The primarily statistical change means world oil demand growth in 2007 is revised up 170,000 b/d, with outright demand a hefty 420,000 b/d higher than it previously expected.

Three consecutive quarters of oil supply growth over 1m b/d from non-OPEC producers will end, with project delays, field exhaustion and maintenance crimping outright supply to 50.2m b/d, 110,000 b/d less than the IEA said last month.

The medium-term picture for Russia, the world's biggest oil producer, is not certain, with its output reaching a plateau within two years due to an uncertain investment climate and constraints in oil services. The IEA said Russia's output may climb 7% to 10.6m b/d by 2010 but then slip a little over the next two years.

The IEA raised its estimated need for OPEC's crude oil this year by 500,000 b/d to 31m b/d and expressed concern about the group's ability to offset the demand with planned capacity expansions by end-2007 of just 700,000 b/d. With the call for OPEC crude oil this year rising 2.5m b/d since March, the challenge to OPEC "would appear to be a key impending market dynamic".

One such challenge comes in Nigeria, where a general strike from June 20 crippled the country and caused world oil prices to rise.

There had been 425,000 b/d month-on-month decline in OPEC's crude oil output in May to 30.1m b/d.

The OPEC-10 - i.e., the 10 member-states with quotas excluding Iraq and new member Angola - experienced an output decline of 290,000 b/d to 26.5m b/d in May. That is 1.2m b/d below the point last September from which the group agreed to cut output to stave off what it feared would be a rout on prices.

The IEA was more sanguine on global crude and fuel inventories, with OECD stocks rising almost 10m barrels by end-April to 2.6 bn barrels - preliminary numbers suggest a 28m barrels build in May - and the number of days of consumption cover unchanged at 54 days. But even there the IEA sounded a warning, with year-on-year volumes down almost 13m barrels and winter stock draws of around 1m b/d.

The IEA said: "The magnitude of the draws could have been doubled if we had not had such a mild winter. This trend could emerge...we remain concerned that the system is stretched". In short, the IEA said "it seems difficult to escape the conclusion that the oil market will be tight in the second half of the year".

APS sources warn there will be a serious world crude oil supply shortages from 2011. These will result from under-investment in oil production capacities in OPEC and non-OPEC areas in view of a major focus on biofuels and other alternative sources of energy in the West starting from this year. Already OPEC Secretary-General Abdullah al-Badri of Libya, Saudi Petroleum & Mineral Resources Minister Ali al-Na'imi and other key OPEC figures have warned of the negative implications of Western energy policies for OPEC and non-OPEC investment in crude oil, oil refining, etc.

Another major obstacle to investment in conventional oil, including oil storage and refining businesses, is the sharp rise in project costs since 2002. For example, Kuwait's new 615,000 b/d oil refining project in 2002 had a budget of about $2 bn. Now, the cost estimate by international contractors for this same project is about $17.2 bn.