OPEC says oil market fundamentals don't explain price surge

By Margaret McQuaile, Richard Swann, with Kate Dourian in Abu Dhabi

January 18, 2011 - Oil market fundamentals do not fully explain the recent surge in crude prices to their highest levels in more than two years, OPEC said January 17, insisting that a combination of high inventories and ample surplus capacity ensured "an adequate cushion of supply” to meet market needs.

Nevertheless, the oil producer club pledged to make as much as 6 million b/d of surplus crude production capacity available in the event of a strong rise in demand or sudden disruption in supply.

OPEC said in its latest monthly oil market report that although its 29.4 million b/d forecast of demand for OPEC crude this year was higher than estimated December production of 29.234 million b/d, "a closer look shows that demand for OPEC crude in the first half of the year will be lower than current OPEC production...which would result in a growing stock cushion.”

The recent surge in oil prices took front-month North Sea Brent crude futures to a fresh two-year high of $99.20/barrel and OPEC’s own crude basket to $94.23/b the week ended January 14.

Despite not having a formal price target, OPEC had informally adopted the $70-$80/b range favored by its biggest producer, Saudi Arabia. But as prices have risen, several ministers have said they see $100/b as a fair price for oil.

OPEC’s current president, Iranian oil minister Masoud Mirkazemi, said at the weekend that $100/b was an appropriate price and that there was no need for an emergency OPEC meeting, even if prices climbed above $120/b. The group, which last met in Ecuador in December, has scheduled its next meeting for June.

UAE oil minister Mohammed bin Dhaen al-Hamli said January 17 the rise in oil prices was due to a rise in demand as a result of economic growth but that world oil markets were well supplied and it was too early to be concerned about current price levels.

OPEC kingpin Saudi Arabia has not pronounced directly on the oil price ascent toward the $100/b level. Oil minister Ali Naimi has said repeatedly that Riyadh’s preferred price range is $70-$80/b, a level that King Abdullah has said is acceptable to both producers and consumers.

Concern

But there is concern outside OPEC about the path oil prices are taking. On January 17, Nobuo Tanaka, executive director of the International Energy Agency, likened current conditions to those of 2008, when crude prices climbed record levels above $147/b. He stopped short of calling on OPEC to increase production but urged the group to be more flexible in its approach.

In its monthly report, OPEC attributed the crude price rise to a general increase across commodities, fueled by expectations of a continued improvement in the global economy and, consequently, increased investment in commodities.

It said that the world economic situation had brightened over the past year but cautioned that there remained several risks which could affect oil prices.

"These include rising sovereign debt concerns in some OECD countries; weaker-than-expected oil demand growth in 2011; excess crude and product inventories, both onshore and offshore; and higher spare capacity in both the upstream and downstream sectors," OPEC said.

OPEC’s 200,000 b/d upward revision of projected demand for its own crude this year was chiefly the result of a more optimistic assessment of world oil demand in 2011.

The group now sees world oil demand growing by 1.23 million b/d this year to 87.32 million b/d, having increased its previous estimate by 50,000 b/d, and now expects average world oil demand of 87.32 million b/d.

The expected increase in demand this year compares with an estimated 1.6 million b/d rise in 2010.

Growth in oil demand in 2011 is dominated by the non-OECD region, which accounts for 85% of the expected increase, with China alone responsible for half of that amount.

Notable increases are also expected from the Middle East, Latin America and other Asian countries, outweighing an expected fall in oil consumption in OECD countries in Europe and the Pacific region.

Chinese demand is expected to rise to 9.28 million b/d this year, up 450,000 b/d from 8.83 million b/d in 2010, OPEC said.

On the supply side, OPEC also increased its estimate of oil production from non-OPEC countries in 2011 by 50,000 b/d. Total non-OPEC supply is now expected to average 52.67 million b/d this year, up 410,000 b/d from 52.26 million b/d in 2010.

OPEC said the increased estimate for non-OPEC supply was due to "various updates in countries' supply profiles" as well as revisions to some historical data. Brazil is the most notable of the countries contributing to the expected 410,000 b/d increase in non-OPEC supply this year, with its production rising by 160,000 b/d to reach 2.87 million b/d.

OPEC’s latest estimates of its own production, derived from secondary sources, show production from the 11 members bound by quotas at 26.776 million b/d, well above their 24.845 million b/d target.

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