Opec Rolls Over, Again!

OPEC is actually scheduled to meet just twice each year but in view of the volatility in recent years has met as much as six times in the year. Furthermore, each member state holding the presidency naturally wants to host a meeting and this usually takes place in December.

This year, with Angola holding the presidency, today’s meeting was held in Luanda and bearing in mind the difficulties involved in achieving a Visa to visit Angola, reaching the country, finding accommodation close to the meeting location, and with the date set so close to Christmas which many involved do celebrate, it is more than an anti-climax to learn that nothing has been agreed on this occasion. However, visitors can see first hand the opulence derived from oil wealth alongside poverty experienced by the people of the country that have not yet and probably never shall benefit from it.

Today the OPEC President HE Eng José Maria Botelho de Vasconcelos of Angola, supported by Mr. Abdalla Salem El-Badri the Secretary General, presided over the OPEC Conference. In the lead up to the event as usually happens, individual ministers had been pursued for comments as to what was going to happen and in reality, probably only two or three of them ever have any real idea while others put out the message they would like the market to pick up on.

This time, all seemed to be agreed that there would be no change to the quotas while Dr. Shokri Ghanem, the Libyan minister went further a declared that compliance on the quota cuts of 4.2mbpd announced last year, would be tightened. Back in March OPEC was delighted that the membership had achieved 80% compliance against the output cuts but since then it has slipped back to around 60% as members had been tempted to increase output to benefit from the higher prices.

So, no one was surprised when the announcement came that OPEC would continue to monitor the economic situation and the market in general. However, with OPEC meetings one can never be absolutely sure as to what might happen and this is the risk taken when not attending. OPEC has been genuinely concerned that oil prices have risen in recent months and for no fundamental reason and accepts that speculator activity has been largely responsible. Earlier in the year, OPEC announced that the recession was coming to an end and that demand would pick up and the price rose accordingly. But when prices get close to the $80 level OPEC knows that in the current economic climate, recovery could be inhibited and if the high oil price has any impact, as I believe it does, then OPEC would get the blame for it!

As prices exceed the $80 level, alternative energy sources start to become attractive again and so too do exploration projects both inside and outside the OPEC membership while, conversely, economic activity and recovery are restricted. Therefore, a balanced price in the $70-80 range is probably better for OPEC in the longer term although some members who tasted the higher prices last year would not agree. Many will take the short term option and I do remember the view some thirty years ago when OPEC members were asked about the potential for natural gas, that many of them were not interested simply because oil revenues were more than adequate for their needs, then. How attitudes have changed!

The figure of $75 is banded around as being acceptable to both producers and consumers but there is nothing scientific in this number it was simply the number quoted by King Abdullah of Saudi Arabia when asked for his views and it has since become the benchmark. Saudi Arabia is probably the most realistic OPEC member in terms of the impact of oil prices on world economic activity and this is a view shared with the OPEC Secretariat.

With the price of oil rising towards the $80 level, the level beyond which recovery could be inhibited, and if the oil price is seen as a contributor, OPEC could take the blame and this is something it does not wish to do and particularly as there is no real tangible evidence that recovery, certainly outside Asia is progressing significantly. So, on the one hand it is content with the price while on the other it wishes to exercise caution.

OPEC will also be mindful of the new rapport between the Middle East and the US and in particular the latest developments in the Middle East peace process which has been running since before the creation of OPEC.

The tension between Iran and much of the rest of the world over its nuclear aspirations will also be a factor as Iran’s revenues are largely derived from oil sales and with prices around the $70 level it will be incurring a deficit while producers like Saudi will be comfortable. Therefore, Saudi will use this opportunity to use its influence within OPEC to increase pressure on Iran.

When OPEC announced the output cut of 4.2mbpd it was felt that this was necessary to control the flow of oil during the worst of the recession. Even so, world stocks are still at record high levels and in spite of claims that floating storage is being used as a for speculative reasons there is also the view that demand is too weak to take it and whereas there may well eventually be a gain the time scale is unpredictable. We still estimate that the OECD stock overhang is well over sixty days and that it is unlikely that the level of 52 days will be met until 2011 unless OPEC moves to full compliance on the cuts at 4.2mbpd for 2010.

OPEC, the IEA and the EIA will all be adjusting their forecast supply-demand figures during the forthcoming year but we can not expect anything too extreme or significant in the short term and certainly not until there is definite evidence that recovery is picking up in OECD countries and the stock overhang is reducing. The market is waiting for such news but for now it will only be coming from Asia – India and China while the rest of the world crawls its way out of recession. However, Asia will have to record a significant increase to exceed the reduction by OECD countries and this may still not be matched for two to three years. Demand will pick up but probably not until late in 2010 or early 2011 and therefore the balance may not be restored until 2012.

The difficulty for Mr. Abdalla Salem El-Badri the OPEC Secretary General is that his role continues irrespective of which member country holds the presidency and next year he will have a new president representing one of the smallest producers in OPEC, Ecuador. The cuts have been in place all year and one should have expected the presidency at least to have supported the directive but Angola has chosen not to do so and it will be interesting to see what output levels are reported from Angola in the future. The Secretary General is very much the “face” of OPEC and his role continues unabated and irrespective of the presidency. Naturally he is loyal to the president but must have felt some frustration this past year at lack of support from Angola and looking ahead he will certainly need the support of the more senior and responsible member countries, namely Saudi Arabia and Algeria, if OPEC is to take a centre stage role in correcting the supply-demand balance.

In the Opening Address this morning the president again called for support from non-OPEC producers to help balance the market but Russia was again not present at this event and it was unlikely that this comment was aimed at any other country. Nevertheless, Iraq with its new licences granted and aspiring to produce over 10mbpd in the future must at some point join in the quota system with other OPEC members as it can not be allowed to produce oil unabated while other members are supposedly cutting. For today though, each member is probably selling as much as possible and for this reason the stock overhang will continue to grow.

The president also made reference to the Copenhagen meeting and reiterated the importance of OPEC members being there to ensure that interests of the oil industry were properly represented at the discussions to keep it in its rightful place in the energy mix in a cleaner, safer and more equitable world. There is naturally concern at the position of oil producers as consumers seek the higher quality lighter crudes against the heavier grades produced by countries such as Saudi Arabia. Yet with so much concern that oil supplies are running short it seems almost bizarre that producers feel their markets are likely to be affected by climate change legislation!

In summary, bearing in mind that this has been a token meeting, and as I said after the last meeting in September, any OPEC decision making will be governed very much by economic activity and whether OPEC members can report a genuine increase in demand for their products globally, but to depend upon Asia, India and China for the position to recover is simply not realistic. Therefore, our view for now is that the oil price is unlikely to average out above $70 during 2010 and we shall continue to monitor and report back.

Further information please contact:- John Hall +44 (0)7785 274530 or Damien Cox +44 (0)1403 269430