Sentiments, especially if one is concerned with the crude markets, change very rapidly. Hardly a few weeks back, crude was flirting with $80 mark and the markets were too concerned with the rising spiral. There were talks, all around, of crude touching the $100 mark by year-end. But within weeks, prices have lost more than $12 a barrel. What a transition indeed!
Market fundamentals appear totally transformed today. After pumping at the maximum capacity for more than two years now, a realization seems to be dawning upon OPEC, and it was evident in Vienna too that it cannot continue the same way for ever.
And thus as the OPEC oil ministers sat down on Monday to discuss their next move on the global energy chess board, the rapidly softening market was very much up on the agenda. Media all around remained receptive to any emerging signal from Vienna about the new OPEC price floor for triggering an output quota cut. The only hint in this direction though came from Iranian Oil Minister Kazem Vaziri-Hamaneh, who emphasized that a price below $60 a barrel could not be termed as favorable. His Venezuelan counterpart Rafael Ramirez also echoed this. Until now, based on “isolated comments from some (OPEC) members,” the group’s floor was assumed to be around $50 a barrel.
Oil market prices, in the meantime, had slumped to five-month low in the week preceding the Vienna moot — having gone down by more than six percent in two weeks. The end of the US driving season and a perception of easing geopolitical and weather risks apparently prompted the markets to reassess fundamentals. In the backdrop of the weakening markets, there were talks of the need for the producers’ to rein in output, so as to handle this rapid transformation.
Saudi Arabia but is still looking at the markets rather optimistically. Oil Minister Ali Al-Naimi has been stressing there was no need for alarms, terming the weakening oil prices only as minor flip and market correction at least for the time being. And thus despite agreeing to maintain the current output level of 28 million bpd, the group vowed to vigilantly monitor the market. It had to, in order to defend its territory. A sense of caution could definitely be sensed all around.
This decision to roll over was made despite the OPEC identifying “many downside risks”. These included the possibility of significant surplus oil supply, rising inventory levels, the risk of a global economic slowdown and the cooling of the geopolitical tensions in the region. OPEC appeared ready to act, if required to. “If we feel the market needs to cut (output) to stabilize, we will do (so),” Qatari Energy Minister Abdullah Bin Hamad Al-Attiyah said in Vienna. The next scheduled ministerial moot in December could be crucial in this sense. However, analysts are suggesting that OPEC might call a meeting before December, if prices fall much lower.
The OPEC decision to maintain output at the previous levels was not completely out of blue. After all, OPEC wanted to appear as a responsible and reliable partner to the energy hungry world. It has proved so many a times in the past too. It is no more the OPEC of the 70s and 80s. Even during the recent Bull Run and despite all the discussions and perceptions about an impending crude shortage, the markets remained well oiled - courtesy OPEC in general and Saudi Arabia in particular. And OPEC had all the reasons not to destroy this neatly carved image.
Saudi Arabia is definitely pursuing for a stable market. With several weeks left yet for peak hurricane season, ensuring the market is well supplied appeared a priority for Riyadh and its partners in OPEC. Iran, otherwise a hawk within the OPEC, also apparently supported the Saudi stand and did not press for any change in group’s output policy. And thus despite murmurs, there were no aggressive calls for cutting production at the meeting.
The decision was based on ground realities too. The hurricane season in the US was still on and could hamper the markets. Further, the possibility of a shutdown in Nigeria due to labor unrests also seemed real and could adversely impact the delicate demand supply balance.
The 2007 outlook, however, is a cause of concern and considerable debate within the OPEC. The call on OPEC crude could drop sharply once independent producers bring on projects for new crude. OPEC is projecting a drop of 800,000 bpd in the call for the group’s oil. The US economy is now showing signs of slowing down and the oil demand in the US, the world’s largest consumer and the major driver of the crude market, has been almost flat so far this year.
In the meantime, global oil demand growth has also been waning, as a result of persistent high prices. IEA has just lowered its worldwide average 2006 demand from its last month’s estimates by 100,000 barrels per day to 84.7 million barrels a day. “OPEC will need to cut production next year and the debate is going to heat up,” analysts are insisting. OPEC ministers would indeed be keeping a weary eye on the markets over the next few weeks.