The script was bare before OPEC oil ministers had even sat down for formal deliberations on Wednesday. The outcome was predictable. With apparently not much fireworks behind the closed doors, it took the ministers barely two hours to get over the formalities and come out with their decision, despite immense political pressure.
Just a day before the meeting, Washington made sure the message reaches all — loud and clear. President George W. Bush warned it would be a “mistake” for the Organization of Petroleum Exporting Countries not to hike production.
“I think it’s a mistake to have your biggest customer’s economy slow down, or your biggest customer’s economy slowing down as a result of high energy prices,” Bush said as he met with Jordan’s King Abdallah.
The pressure was definitely piling up. Washington hinted even a modest output increase of 300,000 bpd to 500,000 bpd could calm prices and help to limit any economic damage.
By deciding to roll over its existing official output OPEC apparently refused to budge, and indeed with sound logic.
The bigwigs within the OPEC have learned to cope with pressures emanating from important global capitals. They seem firm on taking a decision on their own. This may be a truly significant development and it would have definite bearing on the way the energy world operates; one cannot miss pointing this out.
The political pressure on oil ministers who sat down recently in Vienna was telling with $100 oil prices appearing more to be a rule rather an exception. But this was nothing new for the oil cartel. Such is the level of stake in this high profile game that the OPEC seems to have come to terms with.
OPEC President Chakib Khelil had admitted before reporters at the cartel’s last meeting in February that some “more sensitive” OPEC members were under immense political pressure. And it may not be very difficult to gauge and speculate about who brought that pressure and on whom.
OPEC has now been insisting for some time that only market fundamentals and nothing else would dictate its decision-making process. Despite the conflicting push and pulls, ministers in Vienna this Wednesday could not have overlooked that, with a weakening dollar, people were putting money in commodities, resulting in appreciating prices of most commodities. And crude is the world’s largest traded commodity; hence the interest of traders and speculators in this too is fairly pronounced. Even gold is getting dearer with almost each passing day.
“Due to the weakening dollar and the rising fear of inflation, investors have put money into commodities, oil included,” says Victor Shum, an energy analyst with Purvin & Gertz in Singapore.
And the ministers were also faced with the specter of rising US inventories. The latest government data showed US crude inventories had risen for a seventh week in a row, while gasoline stockpiles reached their highest in 14 years.
The substantial build up in crude oil and gasoline stocks once again underlined the concerns about the economy of the world’s biggest oil consumer, and the weakening prospects of future oil demand.
Crude oil stocks rose by 3.2 million barrels to 308.5 million barrels in the week ended Feb. 22 against expectations of a buildup of 2.5 million barrels only. Supplies have jumped 25.7 million barrels, or 9.1 percent, in the past seven weeks and inventories last week were 7 percent above the five-year average for the period, the US energy department said. Crude stockpiles were 1.9 percent above the five-year average a week earlier. Gasoline stocks jumped 2.35 million barrels to 232.6 million barrels, the 16th straight gain, an Energy Department report showed. This was all the more exceptional as the market expected an increase of only 300,000 barrels. This has been the seventh straight weekly rise recorded in US crude inventories since January.
Inventories of motor fuel are also at the highest since 1994. Gasoline supplies were 17 percent above the five-year average last week, the department said.
“Crude oil inventories are starting to look very healthy and gasoline inventories are tremendous,” said Michael Lynch, president of Strategic Energy and Economic Research in Winchester, Massachusetts. “Demand is awful and there’s a lot of oil that’s on its way here. There is going to be serious downward pressure on this market within a few weeks.” The ministers could not have overlooked this.
There was a timing factor, too. The ministers were sitting to decide about their next move when oil demand tends to decline. Typically the demand eases in the second quarter following the end of the northern hemisphere winter and refiners often take advantage of the drop in consumption to carry out maintenance. OPEC data says oil demand falls by around two million barrels per day (bpd) on average in the second quarter.
And the hints were all too clear, too: “Gasoline stocks are high, then we have a second quarter reduction in demand and with the economic situation in the US, probably a recession, demand will definitely fall, maybe not by much,” OPEC President Khelil said earlier in Abuja, Nigeria.
And it was in this perspective that the OPEC ministers observed: “The market is well-supplied, with current commercial oil stocks standing above their five-year average.” The conference further noted “with concern,” that the current price environment does not reflect market fundamentals (of supply and demand), as crude oil prices are being strongly influenced by the weakness in the US dollar, rising inflation and significant flow of funds into the commodities market.
Market fundamentals could not have driven OPEC somewhere else, one could safely underline here.