Some sort of reversal of fortunes seems to be on card!
The surging crude prices have finally been tamed, at least to some extent and for the time being. What appeared ominous and virtually impossible for any one including the oil producers to control until even a few weeks back — has somehow been achieved. After wandering in 60s, and even flirting with $70 plus a barrel for a couple of days in August, the crude prices finally seem to be settling — at least for the time being around the mid-50 level.
Intriguingly this all happened while OPEC’s 11 (including Iraq) crude production, according to various sources, went down in October by around 220,000-240,000 bpd, as compared to September. Intriguing indeed in many respects!
According to a Platts survey of OPEC and oil industry executives, crude production from OPEC’s 11 members fell 240,000 barrels per day to 30.07 million bpd in October from 30.31-million bpd in September.
Dow Jones estimated the drop in OPEC-11 production in October to be 220,000 bpd, saying the oil organization produced 30.06 million bpd last month when compared to the revised estimates of September.
Lower Iraqi crude production in October, on various accounts, appeared to be one of the key factors behind the reduced OPEC production last month. The Dow Jones said that the Iraqi production fell 240,000 bpd to 1.83 million bpd in October. Bad weather and technical problems resulted in reduced exports from the southern Iraqi oil terminals, from where the bulk of Iraqi oil is shipped. On the other hand, Iraq’s northern export route to Ceyhan also functioned sporadically during the month, contributing to lower production, Dow Jones commented.
As per Platts, “the drop in OPEC production largely reflected a plunge in output from Iraq, whose production and exports have fluctuated widely since the March 2003 US-led invasion as the country has struggled to rebuild its beleaguered oil sector.”
Iraqi crude production has been stuck near two million bpd and a significant increase is not expected soon. Repeated sabotage, combined with poor management and political instability, have hamstrung Iraq’s ability to boost output to even the three million bpd output levels, last seen in 1990 - before the invasion of Kuwait and the subsequent sanctions regime.
This inability of Iraq to touch the three million barrels a day pre-1990 level has been a point of concern especially to those who had been pleading the case that a war in Iraq would ultimately help stabilize the crude markets. Many then had thought Iraqi production could subsequently go up to six million barrels a day. Some had even gone to the extent that Iraq could eventually be another Saudi Arabia.
In the run up to the war on Baghdad there were also calls for complete privatization of the Iraqi fields - once Saddam is annihilated. Indeed besides attracting a lot of much required investment in the dilapidated Iraqi oil sector, this laissez faire vision of privatized Iraqi oil operation, could also have gone a long way in decimating the oil cartel — OPEC, many in Washington then had argued.
However, all that vision about Iraqi oil leaving a cooling and soothing impact on the global crude markets — and flooring the prices — seems to have been shattered in the meantime - at least for the time being. In fact, the current Iraqi security scenario is adding to the fear premium that consumers all around are today paying.
And in this backdrop the current softening of the crude markets despite this drop in OPEC production is somewhat astonishing. Market fundamentals seem to undergoing a sea change in recent weeks.
A host of factors including the not so cold weather, as yet, in the northern hemisphere, the higher than anticipated stock levels in the world largest economy — the US, a stronger dollar against most global currencies and the continued trimming of the global energy consumption growth forecasts by various agencies including the IEA and the OPEC seem to have impacted the fortunes of the global crude markets. And already calls are out to reconsider the OPEC output levels.
“Even with a reduction in OPEC output last month, albeit mostly from Iraq, the organization actually faces an issue of cutting production when it meets next month,” said John Kingston, Platts’ global director of oil. “This is close to unbelievable, given the loss in output from the Gulf of Mexico after Katrina and Rita. Yet despite that, inventories are building, we’re coming out of the 4th quarter — which is the heaviest demand quarter — and it’s not unreasonable for the OPEC countries to see the market as heavily oversupplied. The reversal (of fortunes) is astounding.”
One indeed cannot challenge the assertion. This is how this oil business is — slippery, unpredictable and challenging — all the times!
