Opec monopoly is still on course to meet oil market challenge: cut production and drive up prices — keeping the world’s economies from recovering.
Publish Date: Saturday,18 July, 2009, at 09:46 PM Doha Time
Reuters/London
A $10-a-barrel price slide, an unseasonable rise in motor fuel stocks and a slackening of output discipline have complicated, but not yet sabotaged, Opec’s quest to push oil prices higher.
Since September last year, Opec has pledged to remove 4.2m barrels per day (bpd) from its production, about 5% of world demand, and by March was delivering around 80% of the promised curbs. Regarded as a record level of discipline, it was highly successful in boosting prices from last December’s low of $32.40 and many predicted supply and demand would return to balance late this year.
At its last meeting in May, the Organisation of the Petroleum Exporting Countries was in upbeat mood and the $75-a-barrel level its members have argued for was very nearly achieved at the end of June when oil hit this year’s peak of $73.38. But since July a different mood has swept financial markets, which are now as focused on economic gloom as on embryonic growth.
“Yes, we are concerned,” a source close to the Angolan Opec presidency said. “But we cannot panic. We have to wait until the meeting in September.” Opec next meets to consider output policy on September 9. “I doubt Opec will do anything, with things as they are. I think they will emphasise compliance,” one Opec delegate said.
“Prices are weak because of views on the economy. People that were optimistic are now pessimistic. This is apart from fundamentals, which are still weak.”
They take a different view now. Opec’s output discipline has dropped to roughly 70% and sluggish US demand, even at the height of the summer driving season, has allowed inventories to swell. Expressed as days of forward demand — a measure closely watched by Opec — stocks in developed countries totalled 62.5 days at the end of May, the International Energy Agency said last week. That compared with 62 days at the end of April and is around 10 days more than Opec considers comfortable.
“Stocks will probably come down to normal levels some time in the first quarter (of 2010)” said David Kirsch, director of market intelligence services at PFC Energy in Washington. “About two months ago, we thought probably some time in the fourth quarter.”
“With prices coming down, that’s going to reduce the incentive of some of the Opec members to cheat. A price of $75 pulls out a lot more oil than $60 will.” “You only have to look at the past year to see that when it was crunch time, they did respond. Earlier this month its mid-term outlook anticipated consumption of its crude would not match the level before last year’s financial crash until 2013. Analysts have taken similar views, arguing the sky-rocketing to a record near $150 – almost exactly a year ago — permanently destroyed some demand and encouraged the development of alternative fuel sources.
While Opec in May anticipated the world demand would drive prices back up to $75 by the end of this year, this month’s price fall and weak demand could mean such confidence was premature.