OPEC’s Oil Market Update
Location: New York
Author:
John Hall
Date: Friday, December 8, 2006
As we move closer to the next OPEC Meeting, just one week away on 14th, December in Abuja Nigeria, conjecture mounts on what OPEC will and should do. The price of crude, WTI/Brent is trading around the $62-63 level and the OPEC basket at $59.
Last year, OPEC ministers implied that they would defend $50 so with the basket around $9 higher, what is there to defend? OPEC maintains that stock levels are too high in the US and that output should be cut further in addition to the 1.2mbpd announced in October by, supposedly, a further 500,000bpd.
However, the last cuts were against actual output and not the set quotas which has created an imbalance amongst the OPEC members’ individual quotas. OPEC needs to demonstrate conclusively that its members have adhered to the agreed cuts before threatening further cuts.
OPEC has called for security of demand, in the same way that consumers want security of supply yet to provide this, consumers need to have sufficient stock levels to balance their loading, while OPEC producers likewise need to maintain high stocks to counter supply disruptions. Without stocks neither party can operate efficiently.
OPEC has expressed concern that prices have fallen from an unnatural high of $78 but has not recognised that prices are still more than double the level they were at three years ago. World economic growth is affected by higher oil prices particularly as over time they filter through to cost of making those goods that are dependent upon crude oil prices.
There is a time lag and the low GDP level expected this year for the US of between 2.5 and 3% is an example of this while, at the same time the US dollar has devalued. However, any action leading to a further increase in the price of oil to offset this will be counter productive as OPEC must recognise.
Mild weather and the lack of any serious geo-political events have taken pressure off oil and speculators are still uncertain over the longer term level of oil prices. But, once the weather gets colder and demand picks up towards its peak consumption period in the first quarter of next year, price will pick up further and if there is any adverse geo-political upset, then we can expect the $70 level to be reached again.
Since the Doha meeting OPEC has talked about the further cut and its views on balancing the market and it will have difficulty in holding the meeting next week without taking decisive action. However, with prices above $60 it has no reason to reduce output although for political credibility it may well do so but whatever action taken it will not apply for forty days.
OPEC is also understood to be considering requests from Angola, Ecuador and Sudan to join and even though these countries can offer further product from the OPEC portfolio, as OPEC observers, they are able to follow the OPEC initiative from the outside anyway. Their memberships can not be in the true interests of OPEC but more to give them a voice for political gain within the OPEC arena.
OPEC has always tried to maintain a “neutral” view and not become involved in the internal affairs of any country but with the addition of these three, supporting statements made by Venezuela and Iran recently, one can expect some outspoken comments to be made upon their entry. The relationship between OPEC and its consumers will more than likely not benefit from their inclusion.
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