(EnergyAsia, April 20 2012, Friday) — World oil prices are being kept high by fears of Middle East supply disruption which are offsetting reports of rising production in the US and other non-OPEC countries, according to consultants Ernst & Young LLP.

As a result, Brent has remained well supported at around US$120 a barrel while US WTI has stayed above US$100.
 
In its latest quarterly update, Ernst & Young LLP said production increases in the US and non-OPEC countries now exceed increases in global oil demand, but the market is deeply concerned about the possibility of further supply interruption from Iran, Syria, Yemen, the Sudans, and the North Sea as well as the continuing low levels of OPEC spare capacity.

Ernst & Young observed that after decades of rising demand and declining supply, the US is consuming less and producing more, lowering its reliance on foreign sources of crude. South America, Russia and Canada have also been raising production.

Marcela Donadio, Americas Oil and Gas Leader, Ernst & Young LLP, said:

“The advent of increased domestic supply is certainly positive for the US economy and energy security. Importing less oil and gas creates a more positive trade balance for the US, and domestic production stimulates job growth, local business revenues and tax receipts, along with other positive economic impacts.”

North America has benefitted from the growth in tight-oil production from the Bakken shale region and increases in natural gas liquids production and Canadian crude supply.

While the US benchmark crude WTI has become disconnected from globally-traded crudes, global crude prices are still high as a result of geopolitical supply uncertainty.

Oil demand in the US and other developed economies in 2012 is expected to continue to decline, but on a global basis will rise by a modest 0.9%, led by the emerging economies.

Ernst & Young noted that US natural gas prices have fallen further as production continues to rise.

Despite shifts away from dry gas production to oil development and to more liquids-rich gas plays, associated gas production continues to be strong. With a very warm winter, surging supplies have kept natural gas storage volumes at “market-crushing” levels.

Power generation is the fuel’s brightest prospect. Even with US electricity demand in decline, natural gas has gained market share in the sector as low gas prices have encouraged fuel-switching. In recent months, natural gas has been increasingly displacing coal for power generation.

The North American shale gas revolution is a cause for concern, said Mr Donadio.

“We’re at a critical point in the shale gas boom where we may start to see some of the small to mid-size players succumb to sustained depressed prices. How much longer can companies continue to produce and sell such a low-priced commodity and keep the lights on?” he asked.