Crude markets are confused. Contradictory signals form OPEC, and perhaps deliberately as some say, made crude markets tumble still further - flirting for the first time with $60 mark in many months. And as markets tumbled, with the US mid-term election just around the corner, proponents of conspiracy theories seemed to be working overtime.
Pundits believe markets are susceptible to politics, and oil markets are no exception. Some assert the oil markets are even more susceptible to politics than other commodities.
Gasoline prices in the US are down some 70 cents a gallon from their peak in August — just a month prior to the November US congressional elections generating interesting speculation all around.
According to a Gallup poll conducted in September, 42 percent of respondents — and almost two-third of them registered Democrats — agreed with the statement that the Bush administration “deliberately manipulated the price of gasoline so that it would decrease before this fall’s elections.” On the other hand, 53 percent of those surveyed did not believe there had been any manipulation of prices.
Meanwhile the rapid downward price slide generated a frenzy of activity within the energy corridors of the world. Many argued that the real reason of concern to the crude suppliers was the current high level of global fuel stocks, and not the decline in prices. US data showed crude inventory at 328.1 million barrels on Sept. 29.
Distillates, including diesel and heating oil, were reported at 151.5 million barrels, 19 percent above the five-year average.
Already in September, the call on OPEC crude was less than previous months. Against an official output ceiling of 28 million bpd, OPEC pumped 29.47 million bpd in September, according to a Reuters survey, which also pointed out OPEC’s overall oil output fell by 380,000 bpd in September - the lowest since April this year.
That the OPEC was taking time to respond was apparent to most of the analysts. Some attributed it to lack of preparation within the organization in face of this eventuality. OPEC was in for some criticism!
First reports of a possible reduction move poured in from Nigeria and Venezuela. Then Kuwait became the first among the Gulf producers to join, and the announcement was made despite Kuwait having close relations with the US at the political level. Iran and Libya, generally regarded as hawks within the organization, also consented to the cuts. The UAE was also mentioned as ready to join. OPEC President Edmund Daukoru also confirmed the reduction could be a million bpd. Chatter was all around. The onus was now on Saudi Arabia. Riyadh was reportedly unhappy with the public posturing of individual members, rather than a unified public stand on the issue.
Saudi Arabia, as per the survey, had to trim its output by 100,000 bpd. The Financial Times estimated the Saudi output cut to the order of 200,000 bpd over the last couple of months. A senior OPEC official however, was quoted as saying the Saudi contribution to the output cut would be around 300,000 barrels per day. Varying figures of Saudi contribution indeed!
In the meantime, news poured in that Saudi Arabia kept crude supplies steady to its customers in Asia for November. However, Saudi Aramco told some of its biggest customers last Monday it would lower November supplies by about 5 percent from this month.
But even the OPEC hinting at possible cuts, the first in two years provoked, dismay in influential capitals including Washington. With hefty winter demand for heating fuels just around the corner, the world still needed all the crude oil that OPEC can pump and it should not overreact to lower oil prices by cutting production, US Energy Secretary Sam Bodman said earlier this week.
Bodman said he planned to drive that point home in likely discussions with OPEC oil ministers ahead of any emergency meeting the organization may hold before its next regularly scheduled meeting in December.
However, as the emphasis within the oil cartel moved over the last week towards reducing the output, a debate seemed to be ensuing within the energy managers about the price levels the producers’ should be targeting in the given circumstances. Of course there is a realization among the energy managers in Riyadh and other OPEC capitals, that high oil prices would impact long term crude prospects - so vitally important for the overall health of the economies of the OPEC member states. Analysts believe that Saudi Arabia is torn between the short-term need to support prices and incomes and the long-term requirement to keep OPEC’s product competitive in relation to non-OPEC producers and the burgeoning investment in alternative fuels, such as ethanol and bio-diesel.
Sustaining a secured demand for oil is of paramount long-term interest to virtually all the OPEC members, every one concedes and the golden egg laying goose cannot and should not be killed. The prevailing confusion within the OPEC could thus be attributed to the competitive push and pulls from conflicting ends.
