This Position Paper examines various explanations for the high, volatile prices witnessed through 2008, and for what is currently driving prices. We argue that in the preceding 5 years production failed to keep pace with demand (spurred by non-OECD economic growth). This tightened OPEC's capacity cushion, amplifying the effect of otherwise-minor geopolitical disruptions to supply.

Scope

*An overview of global oil market dynamics through the last 5 years; supply, demand, regional variations and historical context

*An explanation for the spike in oil prices through 2008, examining the relative impacts of economic growth, capacity constraints, and speculation

*An analysis of current oil price dynamics and likely direction in the near term

Highlights

The relative decline in non-OPEC oil production (mainly from Russia) and tight capacity margins in Saudi Arabia - OPEC's key swing state - amplified otherwise insignificant external factors, resulting in higher, more volatile price patterns.

The present return to oil prices between US$65 - US$75/Bbl has been driven partly by a return to growth in Asia and a slowing rate of decline in Europe. However, the recovery should at this stage be seen as a financial recovery only, so the rebound does not truly reflect genuine fundamentals

As Saudi Arabia's massive Khurais field comes on stream OPEC's capacity cushion will widen to comfortable levels again. This will allow the swing producer to vary output according to changes in non-OPEC supply. Thus although the recession was responsible for the collapse in oil, OPEC's increased capacity will keep prices low beyond the near term

Reasons to Purchase

*Understand global oil price dynamics over the past 5 years and formulate your own position on the causes of the price spike in 2008

*Determine the underlying factors currently driving oil prices and the relative weight of these factors against one another

*Understand what will shape the price of oil in the near term and beyond