Oil markets are fancying rough weather. With stocks piling and prices crumbling, crude markets are currently hovering around the mid-50 mark — lowest in almost 18 months. Hardly a few days into the New Year and oil markets have lost considerable ground — an alarming scenario for the oil producers indeed. Prices have dropped by more than 4 dollar a barrel — nearly 8 percent — since the advent of the New Year.
The US is the largest crude market in the world, consuming about 25 percent of the world total and any changes in the US affects the markets. The US government data released late last week showed a two million barrel rise in distillate stocks, including heating oil, generating a ripple effect in the already disturbed crude markets.
Petroleum stocks were also reported to have risen by a hefty 5.6 million barrels, much more than the 1.5 million barrels forecast by analysts earlier, overshadowing a 1.3 million barrel fall in crude stocks. Mild weather is also not helping the crude cause. The unexpected mild weather in the US Northeast, the top heating oil consumer region, and also in Europe, has undercut demand for fuel, putting downward pressure on prices.
Demand pessimism also seems to be bearing heavily on the overall supply — demand equation. “Weather is certainly a key driver of sentiment, but what has been set in motion is far more general demand pessimism for the year ahead,” Barclays Capital said in a report. “This has produced a market that is more sensitive than usual to any producer hedging, and which is inclined to attempt to break sharply lower,” it insisted
And OPEC is keeping a weary eye on all these developments. The oil organization is widely believed to be defending an undeclared target of $60 a barrel for US crude. That base is eroding — under threat for the time being. It has already been breached and the OPEC headquarters in Vienna is getting ready to face the scenario.
After all the consequences for such a sharp drop in prices for the oil dependent economies of most of the oil producing countries, could easily be termed as painful. Several steps hence are in offing now!
Signals are now on the horizon that in case crude markets continue to behave the current way, the OPEC may convene an emergency meeting. “OPEC ministers are watching the market vigilantly. If these prices persist or there is a continued decline on the horizon, then the group would consider meeting,” Hossein Kazempur Ardebili, Iran’s governor to OPEC told Dow Jones Newswires. However, no time frame for the proposed meeting was suggested. On Monday, the Venezuelan Oil Minister Rafael Ramirez also called for an emergency meeting of the organization ahead of the group’s scheduled March 15 session to discuss (the falling) prices
OPEC President Mohammed Al-Hamli is now reportedly holding “intensive” consultations with member states “over phone” on further action to stem the sharp drop in oil prices; it was also reported on Tuesday. Several Gulf ministers, Nigeria’s top oil official Edmund Daukoru and Venezuela’s oil minister are reportedly in the loop. Hints of more actions, to stem the rot as some say, are already there to be taken note of. Some OPEC members are already mulling cancellation of capacity expansion projects, currently underway or on the drawing boards. The Kuwaiti oil minister Ali Jarrah Al-Sabah was quoted as saying on Tuesday “we will have to cancel projects if prices continue to fall. Falling prices will damage our economies.’’ The ten members of the group adhering to production quotas within the OPEC, including Saudi Arabia, the UAE and Qatar, plan Projects worth $100 billion to boost daily crude output capacity.
Saudi Arabian Monetary Agency’s governor, while in Basel, also emphasized on the negative impact of the falling oil prices on the oil producing economies of the Gulf.
Some industry sources have a feeling that geopolitical tensions, in the oil producing region would prevent prices from staying below $60 mark. And they had reasons for this optimism — or pessimism — from the other side of the globe.
Tensions seem to keep stoking the fire. When Russian halted crude supplies through a pipeline that met a fifth of demand from Europe’s largest economy Germany, prices reacted positively. Russian crude supplies through the 1.8 million barrels per day (bpd) Druzhba (friendship) pipeline to Poland and Germany was stopped overnight, Polish officials said on Monday. Russia is the world’s second largest exporter and about two-fifths of its shipments go through the line.
There are people who are also getting increasing weary of developments on the US — Iran front and its impact on the crude markets — at least in the shorter run.
And in the meantime, to firm up the markets in the immediate term, Saudi Arabia is also planning to reduce supplies to Asia by 12 to 14 percent in February — the most in two years, a Bloomberg news survey of six refiners in Asia reported this week. According to Reuters, Saudi Arabia will cut oil output by 158,000 bpd from Feb. 1 in line with OPEC’s latest production cut. It was reported that the kingdom’s total cut, including curbs in November, would equal 538,000 bpd. That would take Saudi supplies to 8.5 million bpd from February.
However, despite the Saudi adherence to the output cut, the OPEC was still faced with its perennial problem of quota busting. A Reuter’s survey showed that OPEC had made little further progress in December in lowering supply to bolster prices. Higher output from some members offset cutbacks by Saudi Arabia and others.
Supply from the 10 countries bound by output targets was 26.96 million bpd in December, up 60,000 bpd from November, the survey found. December supply was 680,000 bpd less than in October, just over half the cut OPEC pledged from Nov. 1.
OPEC has been able to live with this indiscipline, but it hurts the very cause OPEC stands for. Riyadh may not stay silent to all this and may ultimately be forced now to draw line somewhere. That could be disastrous, in more than one ways.
