The 147th (extraordinary) OPEC ministerial moot in Vienna today is taking place amid contradictory push and pulls and in a sensitive environment.
OPEC ministerials are often under microscope, and this time too it is no different. The world is awaiting the outcome.
With President Bush, Samuel Bodman, the IEA, all in chorus for the cartel to open its taps, it’s definitely a tough call. Only a couple of days back the US Energy Secretary Samuel Bodman made it clear that the US would be able to make do if OPEC declined to boost oil production. If OPEC nations fail to raise production, “then that’s what they decide and we’ll move forward,” Bodman said.
Clearly OPEC doesn’t want high oil prices to kill the world economy since that would cut crude demand. But if production is increased and the economy stalls anyway, oil prices could collapse — a dicey situation indeed.
That’s exactly what happened in 1997, when OPEC boosted production at a fall meeting in Jakarta, only to have the Asian financial crisis erode demand for crude the next year. Once bitten twice shy, analysts now say the so-called “Ghost of Jakarta” haunts OPEC — as between the end of 1997 and the end of 1998, crude prices lost 50 percent and plummeted from $20 to $10 a barrel.
OPEC is not ready to take it now.
Crude markets are definitely slippery today. With the US — and indeed the global — economy on the verge of recession and the health of global economy under microscope, global crude consumption taking a hit — and a severe one — could not be ruled out altogether. Thus with question marks about crude demand pattern persisting — and even growing — for the OPEC to increase production at this stage could be sensitive. And further with oil use typically waning as temperatures warm in Japan, Europe and the US, reducing the need for heating fuels, ministers are faced with a difficult call. OPEC forecasts demand for its oil will decline by 1.45 million barrels a day in the second quarter because of seasonal refinery maintenance and shutdowns.
Pundits are thus weary and apprehensive. Most feel the oil cartel would prefer to maintain the output level for the time being and some even going on to project that OPEC may in fact have to ultimately cut output in its subsequent meeting scheduled on March 1.
“Given expectations for global supply and demand to be almost balanced in the first quarter, we expect OPEC to trim actual output in March or April,” Societe Generale’s Mike Wittner said earlier the week.
“The general sense is they are not going to do anything,” said Ann-Louise Hittle, an oil analyst with the energy consultants Wood Mackenzie. “With the economy being weak, prices could come down anyway.”
“OPEC would be shooting themselves in the foot if they increased supply,” Michael Davies, head of research at Sucden (UK) Ltd. in London, said in an interview. “China and India, the drivers of demand growth, won’t be immune to a US slowdown.” “There’s a 60 percent chance they’ll increase production as the US is putting pressure on Saudi Arabia,” Hannes Loacker, an analyst at Raiffeisen Zentralbank Oesterriech in Vienna, said in an interview.
“I don’t think an action will be taken during the meeting,” a senior Gulf-based delegate of the Organization of Petroleum Exporting Countries told Dow Jones Newswires earlier the week. “During our last meeting in December, it was agreed that any decision will be taken in March, unless something major happens that warrants action during the extraordinary meeting that was set for February. But there is no need, the market situation is still where it was in December,” he said. According to Falah Alamri, chairman of OPEC’s board of governors, Iraq’s OPEC governor and the head of Iraq’s State Oil Marketing Organization, the prevailing view in the group is that there’s no need for an output change in February. “The general opinion among OPEC ministers is to maintain the current production level. OPEC isn’t in a position to increase production,” Alamri said last Saturday from Baghdad.
Qatar’s oil minister Abdullah bin Hamad Al-Attiyah told Dow Jones that any agreement by OPEC may not ease prices. “We are very concerned by recession but pumping more oil won’t necessarily help prices. We have to look at demand closely,” the minister said.
UAE Energy Minister Mohammad bin Dha’en Al-Hamili also stressed that the OPEC would review market conditions at its next meeting before taking any decision.
“Nobody knows at this point what OPEC will decide. We have to first meet and then look at the market conditions. We have to also look at the data,” Al-Hamili said in Abu Dhabi earlier the week. There’s “no need for additional barrels,” Hossein Kazempour Ardebili, the OPEC governor for Iran, OPEC’s second-largest producer, said in an interview delineating Tehran’s position on the issue.
And indeed when crude is discussed, politics cannot stay away too — for long. At times decisions are taken with political connotations too — one has to concede.
Just a word of caution here. OPEC in the past has had successfully camouflaged its real intentions until the last moment, confounding the pundits beforehand, and one could not write off a surprise this time too — who knows.