144th Meeting of the OPEC Conference

With oil prices doubling since 2003 and trebling since 2002, OECD countries have been severely damaged by higher prices and wherever possible manufacturing has been transferred out of Europe and the US towards the East, India and China where labour costs are low, of little consequence and environmental controls minimal or non existent. OPEC has again indicated its concern over climate change yet does not recognise that higher oil prices are causing a transfer of industry from one part of the world to another and to a part of the world where emissions can be transferred without fear of punitive controls.

Following on in the same vein, the trade deficit between the West and China has now reached such a level that sanctions of some kind are being suggested against China. Yet in spite of the massive sell off of in the Chinese market recently and now with a similar fall off in US market, basic supply demand fundamentals are still driving the oil market and one can not determine what effect this will have ultimately on oil demand. Furthermore, the fear that there is a one in three chance that the US may suffer a recession and with the stock market fall today there is perhaps more concern that oil demand from the US will be curtailed but, as yet, there is no sound data on which to accurately assess the position.

The International Energy Agency earlier this week issued a warning that unless world stocks are replenished there could be shortages later in the year and has called upon OPEC to increase output. However, for OPEC, no such decision will be considered until the crisis is actually felt. Forward planning as such is not part of the strategy. So, from the OPEC viewpoint, what prevails -greed or reality? From my perspective I do not believe that reality is getting a fair chance and unless stocks are replenished we could soon be facing acute market volatility. OPEC has not given a view on this point yet and I believe it should.

OPEC has previously called for “security of demand” but any form of demand balancing requires higher and more adequate stocks to provide the cushion in times of supply disruptions. Therefore, at the slightest hint of cold weather or any form of supply disruption, we can expect prices to spike and until stocks have been replenished not just in the US but in Europe too, the market will remain vulnerable.

Last year OPEC announced cuts of 1.7mbpd against the September production figures as opposed to the pre-determined quotas. OPEC could not police the quotas and so it was convenient to stipulate reductions against the actual production levels. In reality thought, we do not know what they truly are. I have spoken to representatives in recent days from producing countries and it would seem that the correct production figures are difficult to formulate. Secondary data tends to be used based on estimates simply because the primary data provided by the actual producers can not be trusted. So estimates are often regarded with greater credibility but they too can not be verified.

OPEC should by now have reduced output to at least 26mbpd but whichever estimates are taken, it would seem that the members are still 500-600,000bpd adrift. Yet they can safely say that they have 60-70% but to retain credibility should aim for 100%. I asked the President if he would be seeking full compliance of the cuts announced and, if so, what effect could we expect it to have on the oil price. He replied that OPEC was happy with the status and would not act further and when I then questioned the data output from secondary sources for February, clearly demonstrating the shortfall in the cuts, he answered again that OPEC was happy and would not discuss further. Perhaps OPEC would like to put off the decision for another day and schedule the next meeting – Extraordinary – for June but, in this respect no such talk. So, we await developments.

US data out yesterday has shown an increase in Crude stocks of 1.1mb but down 14.6mb on the same time last year and, more importantly, a decrease of Gasoline stocks of 2.5mb, down 10mb on the corresponding figure for last year. Distillate stocks too were down against last week by 2.8mb on last week and 7.1mb against last year. This is not good news because demand for Gasoline picks up at this time of year and progresses towards the summer driving season which conveniently merges in to the hurricane season. For this coming year we can not expect to enjoy another year with little occurrences of hurricanes. As ministers have said, we have not seen any evidence of a downturn in demand following stock market falls around the world so action can not be taken. However, in the background, and OPEC is painfully aware of this, higher oil prices are leading to increased exploration in non-OPEC regions and increased interest in alternative fuels.

With climate change so popular right now one would think that the use of coal would be banned yet due to increased use of coal in the UK, the emissions have increased further as the higher oil price pushed the gas price up and rendered it uncompetitive during the first half of 2006 against coal. Meanwhile, China is opening up a new coal fired station every five days or so no doubt supported by demand for increased industrial output to maintain its trade deficit with the West. So, will demand for oil increase as predicted or to fall back?

That is the issue that as yet can not be answered. Sustainable alternative fuel sources require longer term planning and with around ten years needed to develop and build a nuclear power station OPEC is not going to worry too much short term about this particular threat. However, at some point forward planning will need to be encompassed and then perhaps the individual members will have to move towards a more cohesive environment in which they operate.

Meanwhile, in the US with WTI around the $60 level oil companies are certainly very excited at prospects for further exploration and if the price can be held up, they certainly will not complain but will consumers continue to pay the high price? I do not believe so, certainly within OECD countries. Conversely, should it fall back to the $40 level, interest will disappear rapidly. What OPEC has to recognise is getting the balance right between greed and reality and for me I should like to see the price closer to $40 than $60 but for OPEC, $60 is the magic figure.

Angola has now joined OPEC and in so doing brought in a new member probably untrained as yet in the political use of oil unlike the presidents of Venezuela and Iran. Angola was the country that was set to account for much of the increase in non-OPEC production and although no definite action has been taken, the rumour is that Angola’s output could be capped at the 2mbpd day level curtailing its aspirations to reach 2.5mbpd by 2012.

Angola will have to pay the membership due around €2m each year and then suffer loss of revenue from 2009 onwards which it may have difficulty in offsetting against the additional political strength that it will derive from being an OPEC member. Ecuador is supposedly set to re-join later this year and as a smaller producer, with an output around the 500,000bpd level, it will be interesting to see how it too copes with the €2m pa membership fee that each member has to pay. Perhaps its neighbour Venezuela will pick it up?

Within OPEC there could be some hopeful prospect from Iraq. I was told that the conference last week involving Iraq and its neighbours was a success and looking ahead there is some confidence in terms of rebuilding the country and its oil industry. Already there are discussions taking place with Shell and Total and later this year plans may emerge for the development of Iraq’s vast reserves of oil and if genuine support can be achieved from its neighbours and the infrastructure rebuilt, Iraq will again make a worthwhile and dependable contribution to world energy requirement and also itself benefit from substantial revenues.

So, for now, there is overall great uncertainty in the market and no comfort to consumers who will have to continue to suffer higher energy prices at least for the foreseeable future and particularly if OPEC agrees to seek full compliance on the cuts agreed last year and still retains the option to ensure that the outstanding 600,000bpd will be withdrawn from the market should the price fall. The unofficial view appears to be that OPEC expects prices to stay with in the $55 to $65 range while discreetly hoping that any pressure short term will be up as opposed to down. The next meeting is scheduled for September but I should not be surprised if something was called or does take place in conjunction with another gathering in June. We shall follow closely.

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