With oil prices receding, there is a growing realization that non-fundamental factors, much beyond the control of the oil producers, are significantly influencing the crude market prices. Peace and tranquility in the oil producing region holds the key to market stability, pundits strongly feel. It is not just a matter of demand and supply, other extraneous factors such as the fear factor, are playing havoc with the crude markets. Most analysts put this fear premium to be somewhere between $8-15 a barrel.
That situation has somewhat changed over the last few months, for a number of reasons, peace and instability in the prime oil producing region being foremost among them. “Prices are moving independently from whatever OPEC decides,” said Nordine Ait-Laoussine, a former Algerian oil minister and OPEC president. “OPEC can’t do anything more today,” emphasized the former OPEC President.
This is a part of the dilemma OPEC faces today. Despite controlling three-quarters of the world’s known oil reserves, producing a third of the global crude requirements and exporting half of it, to the energy thirsty world, factors independent of whatever OPEC is doing to rein in prices, seem to be impacting the global markets.
OPEC President Purnomo Yusgiantro also agrees to the contention. He says that OPEC oil production has been enhanced to meet the escalating global demand. However, he insists that the over-inflated prices can only be brought down by resolving global conflicts.
Yusgiantro said production by the OPEC 10 — excluding Iraq — was nearing 30 million barrels per day, with up to a further 1 million bpd on standby and plans afoot for further capacity increases within the next 18 months.
And while OPEC is trying to cool down the markets, by increasing the supplies, it was also coupled with the possibility of a reduction in global oil demand. “Recent world oil demand will ease in the second half of this year, as a surge in Chinese consumption starts to slow,” the International Energy Agency said. According to reports, the Chinese oil demand, slowed to 14 percent in July, down from a meteoric 25 percent jump in the second quarter, the IEA said. It estimated the Chinese demand at 6.32 million bpd in July. It seems the Chinese government’s efforts to engineer a soft economic landing are gaining some strength. “Chinese demand growth remained, by any standard, extremely robust in July, but slowed markedly in comparison to the record-breaking rate of the first half of 2004,” the IEA said in its report.
Hence, the OPEC president while talking to the press during the 19th World Oil Congress at Sydney again blamed the “political premium” of $10-15 a barrel for the higher than normal crude market prices. Yusgiantro said the higher oil prices are for exceptional reasons, leaving little room for the OPEC to maneuver on the issue. He cited market speculation and geopolitical factors, including the ongoing unrest in Iraq and the government action against the Russian largest oil producer Yukos, as being major reasons for the current upheaval in the crude markets.
Some analysts put forward the theory that most of the recoverable oil resources are located in a volatile region.