As was anticipated, OPEC finally decided to “stay the course,” keeping the output unchanged. The global consumption pattern, so very crucial to OPEC decision-making, is still far from clear. With the demand pattern hazy, collapsing demand has been a cause of real concern to the oil ministers and they were overtly conscious of the fact. The atmosphere at the OPEC headquarters meeting room yesterday was definitely sober if not grim.
And as the OPEC ministers argued their next move on the global energy chessboard, a number of conflicting factors were indeed weighing up on their minds; it was fairly evident in Vienna yesterday afternoon. Contradictory claims about the state of the global economy and the consequent global crude demand crash continue to torment the markets. The rate at which demand recovers remains a critical, unknown variable. And the ministers have been required to take a decision without being able to peep into the foreseeable future.
Despite some glimmer of hope here and there the US Federal Reserve continues to see “significant downside risks” for the US economy, with the global financial system still “vulnerable to further shocks.” Japan, the world’s second-largest economy, suffered the biggest contraction since records began in 1955 with GDP dropping at an annualized rate of 15 percent in 1Q09 while Europe registered a three-month GDP decline of 2.5 percent in the same quarter.
In the meantime, former US Federal Reserve Chairman Alan Greenspan strongly feels that the global financial crisis has not run its course and that “there is still a very large unfunded capital requirement in the commercial banking system in the United States.”
While the global economic fundamentals continue to remain dire and unemployment continues to rise across the world, stock markets continue to be buoyant and the price of oil has edged higher in the last few weeks. Despite some weakening over the last few days, crude markets hover around the $60 mark. Demand estimates, however, continue to be murky.
The IEA estimates the oil demand this year to fall by 3 percent, the sharpest drop in about 30 years, to about 83 million barrels a day. And the oil scene continues to be murky and pessimistic. Indeed, the world today is using much less oil than it did a year ago. In the first quarter of 2009, global oil demand was an estimated 3.6 million bpd down on the previous year, the London-based Center for Global Energy Studies (CGES) said in its just-released Monthly Oil Report. In the current quarter too, the CGES projects a year-on-year drop in demand of around 1.5 million bpd.
However, the CGES points out it is beginning to look as if global oil consumption in Q2 this year could turn out to be higher than it was in Q1, potentially bringing to an end a run of five consecutive quarters of falling global oil demand.
This is not to say that the outlook for oil demand growth is good, but that it is less awful than it has been in recent months, the influential energy think tank commented.
Then the issue of quota compliance was also very much on the minds of the ministers occupying the central place yesterday. With some easing of the situation, compliance with the cuts now seems slipping down to 77 percent in April as against 80 percent the month earlier.
Up to now Riyadh has been bearing a significant portion of the burden of the output cut, even going below its sanctioned quota — apparently to try and ensure a balanced market. But not everyone seems to be complying fully and that was definitely a point of concern to the OPEC energy ministers yesterday.
And yet for a change, with prices hovering around $60, the markets seems indeed to have shrugged off the economic gloom and reports including the fact that more than 70 tankers, holding 130 million barrels of oil in floating storage, were moored off the coasts of major oil consuming countries.
The question remained how can the oil price, along with equities, defy reality and show a measure of exuberance in the face of such a depressing economic reality?
One answer is speculators returning to the markets. OPEC has been raising voice on the issue as in recent days there has been a substantial rise in the open interest positions (both long and short) of the group of non-reporting players, or small-scale speculators, at NYMEX. These small-scale speculators now hold the largest net long positions. And markets seem to be holding on to this lifeline. And in the circumstances, if OPEC had decided to do otherwise, the world would have been lampooning it today. No one indeed loves to be on the line of fire.
The OPEC ministers were thus required to take decision in an uncertain scenario. It was faced with conflicting signals—not an easy phenomenon indeed! The OPEC decision needs to be seen in this very perspective. It is, after all, prudent to defer drastic measures unless one is sure of how things would shape. And this is exactly what OPEC did yesterday.