As the oil ministers from the OPEC sat down in Vienna to discuss their next move as prices already at $55 a barrel, market signals were a cause of concern to many. Crude markets are presently balanced but the fact remains that on account of many well known reasons, the balance is precarious. The slightest hint of a disruption or the smallest of movements which could impact the thin edge demand-supply balance make the markets itchy and nervous. It then reacts accordingly. For almost the entire last week, the markets have been reacting rather erratically to similar far-flung developments.
Reports from Baghdad contributed to this now familiar pattern. Iraq reportedly is planning to cut down its already lower than potential oil exports by an additional 15 percent during the second half of the year - apparently owing to the ongoing insurgency in the country which often targets the oil infra structure. Further despite the euphoria that once the war gets over, there would a flood of investments in the country which could take the country’s production to record new levels. However, that did not take place. The resultant lack of investment in the oil related infrastructure in the country has in practical terms, diminished the possibility of any substantial increase in crude exports from the country in the immediate future. In fact for the remaining part of the year it has now been reported that it is going to be even less than previous months and years. Markets definitely became uneasy at this development.
The situation now is such that even the slightest hint of any disruption in oil flow generates its own ripples. Even the hint of a storm witnesses the market reacting desperately. As soon as the word started to spread that the first tropical storm of the season could impact the oil production in offshore Gulf of Mexico, crude prices started to firm up in the markets. As the news took rounds that Chevron, ExxonMobil and several other oil companies were shutting some of their oil and gas production, last weekend, ahead of the Tropical Storm Arlene, and that hundreds of offshore oil workers had to be evacuated, the price of the US light sweet crude firmed up in the vicinity of $55 a barrel on the New York Mercantile Exchange.
On the other hand, crude markets also did not take the market oil report from the OECD energy watchdog International Energy Agency lightly. The report showed a slower demand growth in China than previous outlooks.
The IEA now sees 2005 China growth as 460,000 barrels a day to 6.89 million bpd, up 7.1 percent from 2004, yet down 10,000 bpd from the last month’s forecast. This also led the crude a few dollar cents in the market place.
In the same report the IEA maintains that last month the total global output rose to 84.6 million barrels - an increase of 260, 000 bpd over April. However, it also predicts that the global oil consumption would also increase by 2.2 percent in 2005, to 84.3 million bpd - not an easy situation indeed for the markets to live with. Hence the concern factor!
Adding fuel to the fire is the speculative aspect — the perception that there is about eight times more “oil on paper” than in the pipeline. It is in this perspective that some OPEC officials have been saying that this kind of speculation was also responsible for adversely impacting the crude market conditions. According to them the price would be $5 to $8 a barrel less, if speculation could be wiped off the market.
With the dawn of this new era in the crude markets, the world has to act in more than one direction. Both the producers and consumers need to cooperate and coordinate at every level rather than confront each other. The days of confrontation of the 70s and 80s have to be over.
As the secretary general of the Riyadh-based International Energy Forum Secretariat, Ambassador Arne Walther told this correspondent earlier this week, “we are now in an era where the consumers as well as the producers — both — either float together or sink together.” Nothing denying this brazen fact of the 21st century!
