by Saadallah Al Fat'hi

10-12-07 The invisible hand of the market has helped the Organisation of Petroleum Exporting Countries (OPEC) to arrive at the right decision in its 146th extraordinary conference in Abu Dhabi.
The enormous pressure on the organisation to increase production was thwarted by the careful consideration of market fundamentals and helped by the sharp decline in prices in the days ahead of the meeting.

The price of the OPEC basket of crude oils was about $ 92 per barrel on November 26, and declined close to $ 84 per barrel on the eve of the conference. Brent and West Texas Intermediate crudes declined even further. Had the price of oil stayed close to the $ 100 per barrel reached earlier, it would have been very difficult for OPEC to do anything except increase production as a gesture to cool off the market.
However, OPEC decided correctly that "market fundamentals have essentially remained unchanged with the market continuing to be well supplied and commercial crude/product stocks remaining at comfortable levels in terms of days of forward cover".

Meeting demand
The level of production of OPEC 10 (excluding Iraq and Angola) in November is believed to be very close to the 27.3 mm bpd agreed upon in September 2007 and with the inclusion of Iraq and Angola, OPEC production is close to just over 31 mm bpd. Iraq has recently increased its production by some 300,000 bpd due to the resumption of operations in its northern pipeline system to Turkey and Angola also recently increased its production by some 150,000 bpd due to the completion of a new development.
This means that the level of OPEC production is now just in line with the average requirements from the organisation for the year 2007 according to supply and demand estimates, given that non-OPEC producers are still producing strongly. With the expected increase in non-OPEC production next year, the call on OPEC oil may be even less than 2007 and thus it would not have been prudent to increase production now andcause further decline in prices only to be forced into a corrective measure early in 2008.

In any case, OPEC is aware of the ups and downs of this volatile market and therefore, it left the door open for further consideration as it will meet in another extraordinary conference in Vienna on February 1, 2008. But let us remember that by then, the winter season would be close to its end and OPEC’s decision will be more influenced by the seasonal decline in demand which is often associated with the second quarter of the year.
I believe that the price will again be the determining factor and OPEC will be reluctant to raise output unless prices reach higher or unprecedented levels.

Outlook
Would OPEC’s decision send prices back to the $ 100 per barrel level? If the recent decline was only in expectation of an increase in OPEC production, then prices should go up again back to where they were now that OPEC has decided not to increase production.
However, the immediate reaction of the market was an increase of about a dollar per barrel by the end of the OPEC meeting and it fizzled the next day to an increase of few cents per barrel only. It is too early to say, but I believe that the market is afraid of a possible slowdown in the demand for oil and a weakness in the economy due to high oil prices.

Nevertheless, none of these expectations is apparent in recent estimates of demand or economic growth. Demand in 2008 is likely to increase by about 2 mm bpd over 2007, according to the International Energy Agency and by about 1.3 mm bpd according to the more prudent OPEC.
World economic growth is estimated at 5.2 % in 2007 and forecasted at just as healthy 4.9 % in 2008. At the same time, one should not only look at today's prices in the market or the maximum level they reached during the year. The average price for the OPEC basket during 2007 is about $ 66 per barrel as compared to the maximum level of $ 92 per barrel reached in November. Oil then and on average is still reasonably priced and the continued weakness and decline of the dollar is not helping market stability at all. Producers need the revenue not only to improve their lot but to invest in an industry where capital cost has gone through the roof in both upstream and downstream projects.

As we approach 2008, let us also hope that the world can find solutions to the persistent problems of turmoil in many regions and particularly around many important producing countries.
Otherwise the market will remain prone to volatility and the "scare factor" is likely to stay with us longer.

The writer is former adviser, Ministry of Oil, Iraq.