Oil producers nervous about speculation

25-09-04

Oil producers in general, both OPEC and non-OPEC members, are a little nervous about oil price speculation these days.


"Psychologically, producers know that the current prices do not essentially indicate the actual oil market scenario, as prices are highly influenced by undue speculation," oil market onlookers in Oman opine. They were responding to the decision taken by OPEC at its 132nd meeting convened in Vienna on September 15, 2004. The meeting has decided to raise the production ceiling (excluding Iraq) by 1 mm bpd, to 27.0 mm bpd, with effect from November 1, 2004.

Will this move bring down prices?
"Prices will always go above normal equilibrium levels when abnormal market-pressures and speculation affect the oil scenario. The decision, of course, was in recognition of the importance of maintaining oil market stability for the benefit of the world economy, as well as consumers and producers. Unwarranted speculation will do no good and, in fact, it will cut all ways to create an orderly price situation," a Chinese oil price analyst said.


Representatives of oil consumers from India and China hoped: "OPEC may remain committed to take measures to stabilise the market at prices reasonable to both producers and consumers."

Since June this year prices have reached record levels, in nominal terms, with OPEC’s reference basket price rising above $ 40 a barrel. On September 15, 2004, the reference basket price stood at $ 39.02 a barrel.


OPEC sources from Vienna told that the organisation sees a combination of factors as being responsible for the high prices and accompanying volatility. There have been higher-than-expected oil demand growth, especially in China and the US; geopolitical tensions; and refining and distribution industry bottlenecks in some major consuming regions, coupled with more stringent product specifications. These factors have led to unwarranted fears about a possible future supply shortage of crude oil, which, in turn, have resulted in increased speculation in the futures markets, with substantial upward pressure on prices.

Dr Purnomo Yusgiantoro, minister of energy and mineral resources of Indonesia, the OPEC chief said, "OPEC has no control over factors like speculation, geopolitical tensions and domestic decisions made by foreign governments".


Though OPEC has no control over speculation, "we are doing everything we can to restore order and stability to the market, with reasonable prices that are acceptable to producers and consumers alike, as well as being compatible with steady growth in the world and domestic economies". In its Beirut meeting, OPEC had agreed on a big two-phase increase in its production ceiling, raising it by 2.0 mm bpd to 25.5 mm bpd, with effect from July 1, and by another 500,000 bpd to 26.0 mm bpd, with effect from August 1.

It is said that OPEC took this decision, even though it knew there was plenty of crude already in the market and that its member countries were already pumping out levels of crude well above the previous ceiling of 23.5 mm bpd.


OPEC believed that, as well as the actual physical fact of agreeing to this big increase in supply to the market, its action would also send a powerful psychological signal that OPEC was ready to act in order to help bring prices down.

In view of the unexpected high rise in demand and the present volatile state of the market, some have been expressing concern about production capacity. Will supply be sufficient to meet demand over the next year or two?


At present, OPEC has spare production capacity of around 1-1.5 mm bpd, which would allow for an immediate additional increase in production. It is welcome that OPEC has plans for additional capacity expansion and may be enacted soon. Creating an oil price situation, which is acceptable to all -- producers and consumers -- is not just the task for OPEC. It is also the responsibility of all producers. It seems that OPEC is gaining more confidence among non-OPEC oil-producing countries like Angola, Egypt, Mexico, Russia, Sudan and Syria.

The OPEC reference basket price -- introduced in 1987 -- is the arithmetic average of seven selected crudes such as Saharan Blend (Algeria); Minas (Indonesia); Bonny Light (Nigeria); Arab Light (Saudi Arabia); Dubai (United Arab Emirates), Tia Juana Light (Venezuela), and Isthmus (Mexico).
Mexico is, however, not a member of OPEC.

 

Source: PetroEnergy Information Network