Another OPEC surprise or just being efficient?

Jul 23, 2004 02:00 AM

by Saadalla Al Fat'hi

OPEC has rightfully decided that there is no need for an extraordinary conference in Vienna on July 21. The decision is the most efficient I can remember as it was agreed among ministers on the phone and apparently without any haggling. It is felt that no critical development has happened in the market to change the decision taken in Beirut. Therefore, the decision taken in Beirut early June to increase the production ceiling by 2.0 mm bpd in July and an additional 500,000 bpd in August, will be implemented without further consideration.
As oil prices eased in the wake of the Beirut decision, there were some concerns whether the additional increase of 0.5 mm bpd would be required. However, oil prices now are almost at the level before the Beirut meeting and the ministers' consultations must have been prompted by the almost $ 2.00 per barrel rally on July 14 to put Nymex crude at almost $ 41 per barrel.

The rally came after the announcement of a decline in US crude and gasoline inventories contrary to all expectations. While the London market and Nymex overnight trading took the market lower, they could not wipe the gains of one day earlier. The impact of the cancellation of the Vienna OPEC conference will not be clear before the announcement is made official later and the market absorbs the effect if any.
However, the market is unlikely to react vigorously and prices may stay buoyant as August lifting is already decided and in any case OPEC is actually producing far above the intended ceiling. OPEC production, excluding Iraq, is estimated at 27.2 mm bpd and Iraq's production in June was close to 1.8 mm bpd.

So what is going on in this fast-moving market? Production is increasing and so are prices and the analysts still stand by the explanations previously given.
In a column in Gulf News on June 3 this year, I said that "it seems to me that all estimates of the supply and demand balances on which production decisions are made seems to have been way out by a large margin. Analysts, including the IEA and OPEC, have made many adjustments in the last few months with the attendant loss of some credibility.”
"Before that, it seemed that demand had been under-estimated, non-OPEC supplies over-estimated and OPEC apparently decided to reduce its production during the second quarter of 2004, the low demand season, to a level commensurate with its expectations of these balances including its own".

I am even more convinced now of what I said earlier as further adjustments in the same direction have been made. This is because other conditions in the market have not substantially changed. The oil supply security concerns are and will continue to bear on the market as long as the situation in Iraq, Saudi Arabia, Venezuela, Nigeria and other producing countries remains unchanged.
Iraq's production in June fell to 1.8 mm bpd (including about 0.2 mm bpd of re-injected crude) and the incidents on its pipelines are multiplying. The gasoline market and the refinery situation in the US are the same and are unlikely to be corrected so quickly.

In this situation, it is no wonder that speculators take an enhanced interest in the market which contributes to further price volatility and upward trend. In my view, the supply and demand estimates are still worrying. Estimates for the whole year suggest that OPEC production for the year should be around 27 mm bpd. To meet that balance OPEC should reduce production to 26 mm bpd rather than raise it to the level we discussed earlier.
This, of course, is unrealistic and does not tally with what is actually happening in the market. Therefore, further adjustments to the supply and demand balances should be expected to come soon. If the current balances are correct, and I do not think they are, then a huge stock build up will eventually turn up and a price decline must follow.

There is nothing to indicate such a possibility. On the contrary, the US Department of Energy is already saying, that next year's demand will diminish the chances of a price decline. IEA, in its last oil market report, is estimating next year's demand to be 1.8 mm bpd above this year's and OPEC’s estimate of the demand increase follows closely.
The next OPEC conference will be in September and it is imperative to look at this issue in detail if a stable market is to be sought. Talking the market up or down will not be sufficient as this year has proved beyond doubt.

Saadalla Al Fat'hi, was the head of the Energy Studies Department at the OPEC Secretariat and is working as an adviser.

Source: Gulf News
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