As the OPEC ministers gathered at the Kuwait Sheraton on Monday morning, the markets were already edgy — courtesy the London blaze. So jittery are the markets now that any event — though small in overall terms — impacts the psyche of the markets significantly.
Hence the knee-jerk reaction of the markets on the OPEC’s twin decisions — reverting to its current official output ceiling of 28 million bpd and withdraw that 2 million barrel extra crude from the table offered last September — basically to soothe the otherwise jittery markets — was very much on cards. Market reaction indeed matched the expectations and prices went up within hours of the decisions.
In the immediate aftermath the US crude rose 65 cents to $60.04 a barrel and the London Brent crude was up 98 cents to $58.25 a barrel. However, market fundamentals do not point to any possible reason for the further firming up of the market. The two million barrels, though of the least wanted heavier quality, that the OPEC ministers decided to withdraw form the table by the end of the year, has been lying there since September, with virtually no takers for the last two months. It may have definitely contributed to the psychological cushion, all these months, yet the fact remained that the market did not need them physically.
The OPEC decision to maintain its current ceiling, and withdraw the 2 million barrels a day offer was made after, apparently, hectic consultations, prior to the meeting, even over the weekend. According to reports there have been contacts and discussions, during the weekend too between the ministers.
A lot of homework was definitely done prior to arriving at the decision. Market fundamentals were closely looked at. Indeed OPEC’s stated objectives remain to ensure fair return to the producers’ and hence the impact of any decision, including its political aftermath was carefully looked at, during the deliberations.
In order to strike a consensus, a compromise was reached. There were calls within the group clamoring to rein in production tightly — in view of the softening markets. There were indications that supplies were in excess of demand. That would have been clearly detrimental to OPEC’s apparent interests.
“The oil market is well-supplied and rising stocks mean it will need less oil from the OPEC in the second and third quarters of the next year,” the group said in the communiqué released after the meeting in Kuwait.
Saudi Oil Minister Ali Al-Naimi, often regarded as the “mover and shaker” within the organization, maintained that oil inventory in the industrialized world was relatively high. And concerns were openly expressed about a possible glut situation in Q206. Demand normally slips and traditionally stocks build further, during that period of the year, in the second quarter. This could definitely translate into a steep fall in prices, some of the ministers strongly felt.
“It warrants a review as we get closer to the second quarter of 2006. That may warrant actions of a different kind to keep the market in balance,” Naimi told the press. “If we continue the way we are ... that number will increase. That’s a lot of crude sloshing around. So come the second quarter that could be a heavy depressant on price. I wouldn’t use collapse, but I would say decline,” he asserted. Hence, the OPEC to review the situation in six weeks time, late in January in Vienna — to take stock of the situation before it’s too late for Q206 and avoid any price collapse — seems very much in line with that thinking.
The OPEC projects the Q106 call on its crude at around 29.8 million bpd and considerably less — around 27.7 million bpd — in the second quarter next year.
The stage however, has been prepared for the January meeting, where the OPEC may well have to take some tough decisions, including a cut in its current official output ceiling — so as to keep markets from collapsing — as some are starting to fear now because of the over supply situation.
A tough decision — as far as the OPEC was concerned — has thus only been averted for some time — six weeks to be exact. That decision could be crucially important for the well-being of the oil organization. But taking and complying with such decisions has not been OPEC’s domain and hence may not be easy enough this time as well. It would require mustering a lot of political will and support — which OPEC has in past found wanting.
Would it be different next time in Vienna — only time could tell! One will have to wait to wait for some more time to reach to a conclusion on the subject.
