(EnergyAsia, August 31 2011, Wednesday) — Oil prices and world demand should continue to rise in the third quarter of 2011 but the supply outlook remains unclear, according to Ernst & Young’s latest oil and gas survey.

Despite an uncertain economic recovery, deficit-reduction initiatives in the US and the debt crisis in Europe, the company expects oil prices to be driven higher by modest demand growth and uncertain supply.

“Barring a strong economic shock, continued strong oil prices seem to be in order over the next three to five years,” said Sanjeev Gupta, Ernst & Young’s Asia-Pacific Oil & Gas Leader.

In the first quarter of this year, with expectations for continued economic improvement and as a result of the supply disruptions from the Middle East, oil prices rose to over US$100 a barrel. But after peaking in the second quarter, crude prices fell back slightly, with the announced stock release by the International Energy Agency (IEA), and as the economic recovery lost some steam.

Mr Gupta said: “In 2011, many economies have technically moved out of recession and are predicted to grow, albeit modestly, over the next several years. Nevertheless, the recoveries remain fragile and uneven and there are a number of uncertainties weighing on the global oil markets. Chief among these uncertainties is the impact higher and more volatile oil prices may have on oil demand growth.”

He expects new production from the Gulf of Mexico amid reports of increasing activity in the second quarter. While overall production remains below pre-2010 levels, the application and permitting process is improving, and increasing production will continue to create jobs and increase US domestic energy supplies at a time of expected strong demand growth.

He said the “big unknowns” for oil producers are the short-term effects of the International Energy Agency’s (IEA) release of 60 million barrels from emergency supplies and OPEC members’ disagreement over supply increases.

The IEA’s announcement briefly brought prices down as traders expected the release to help fill the loss of Libyan supplies.

However, as the market moves into the high-demand season, Mr Gupta said the IEA barrels will not meet that increased demand, and the market will need more supply from OPEC at a time when its spare capacity is at its lowest level in more than 20 years.

Beyond the short-term, over the next three to five years, he expects OPEC to face increasing pressures to raise substantially capacity and production.

Elsewhere, he said US natural gas production continues to grow, with the latest production figures reaching the highest point in almost 40 years.

Shale gas is driving the growth and is now approaching about 30% of US total gas production, even as gas-directed drilling has slowed and issues surrounding the economic feasibility and potential environmental impacts of the resource are raised.

China’s latest five-year plan expects the doubling of natural gas demand by 2015 which is likely to spur increasing competition for supplies from Central Asia, Russia and Australia.