OPEC Oil Market Update

OPEC ministers were concerned that the price of oil should have dropped so quickly from $78 to $60.  Surely the message here is that $78 was just too high!  Furthermore, who can say that a trebling of the oil price in three years from $25 to $75+ was not too fast and unnatural? 

OPEC Ministers have finally admitted that they are defending the price at $60 and perhaps if they had made that statement earlier, when they had the chance, the subsequent announcement that output would be reduced by 1.2mbpd from 1^st . November would have had some credibility. 

Instead, ad hoc statements were made by individual ministers in the lead up to the Doha meeting in October and, until it happened, there was even some uncertainty that they would all even get there.

The market has been protected in recent months.  Geo-political tension has abated with the cessation of the hostilities between Israel and Hezbollah in Lebanon and the assumption that Iran would actually halt its nuclear enrichment programme while in the Gulf of Mexico the hurricanes just didn’t happen and for now, the pressure is off. 

However, tension is rising in the Middle East.  In fact it is always prevalent and until there is some kind of peace between Israel and Palestine it will not go away.

The situation in Iraq worsens and perhaps US aspirations of developing the oil infrastructure across the Middle East must be reducing as those producers that have traditionally looked West for expertise and investment are now looking East.  Likewise, many European countries must also be disappointed as the political framework continues to change. 

However, in the US mid-term elections the Democrats have swept to power and they will certainly take a softer line with Iran and hopefully, countries that are in conflict with the Bush regime will acknowledge the opportunities for dialogue which now must follow.

The price of oil is still high and should be closer to $40 than $60 but from OPEC’s point of view, aspirations must be higher as, through not fault of their own, the price of oil has risen and with it has come new found wealth.  In particular Presidents Armadinjad and Chavez of Iran and Venezuela respectively need that additional revenue to fund their ambitious and non-oil development related programmes. 

Likewise President Putin of Russia is happy to enjoy the additional oil revenue while at the same time benefiting for the massive increase in demand for natural gas.  He can remain outside OPEC but collect the bonuses.  In the background OPEC can rightly say that many Western governments achieve more revenue from OPEC oil than they do, through down stream taxation whether under the guise of “environmental” taxation or simply a straight revenue raiser.  The UK Government has to be at the top of this list.

Yet what is not acknowledged is the long term damage that consuming nations are suffering and will continue to suffer as a direct consequence of higher oil prices.  The fact that prices have been high for three years is no reason to state that consumers have factored them in to their respective economies and can live with them. 

Admittedly, higher prices have increased awareness on Climate Change and the need for diversification away from fossil fuels but this will take time.

This year US GDP will be lucky to hit 3% while in the UK at least 100,000 jobs have been lost from the manufacturing sector from high energy prices alone and what is also not acknowledged is the shift away from manufacturing in Europe and also the US to other parts of the world, such as India and China, where labour costs are cheaper and environmental controls less demanding. 

Against this background, how is the developing world coping?  Iraq may have vast oil resources but it still has to import refined products such as gasoline as do all other countries in the developing world and the outlook for them as oil prices remain at the $60 level is bleaker still.

Next month OPEC meets again and from the messages being given out already the hardliners, plus Saudi and Kuwait, will be looking for further cuts in output.  Yet from the consumers’ view point some constructive action has been taken this year, admittedly helped by the lack of hurricanes and other setbacks, in that oil stocks have been built up and short term interruptions can be accommodated without this ridiculous situation that the price soars or collapses on any item of news. 

However, US stocks are being depleted this year at a faster rate than last and when demand does pick up in winter and the weather does change, consumers will be in a more vulnerable position, and the price can only go up.  Traders in the meantime are holding back and the market is it seems in “sell” mode, for now, but, beware, that can change all too rapidly.  So, OPEC needs to take a balanced view and appreciate that long term damage will be inflicted on world economic growth if prices remain at these levels.