DAMMAM, 27 July 2007 — It was the same then too, in the mid-1980s, just prior to the global oil market crash. Growing calls for the Organization of the Petroleum Exporting Countries (OPEC) to open its taps were emanating from every quarter. The same appears to also be the case now.
The pressure is once again building up. The clamor for OPEC to open its taps is becoming vociferous — coming from all around — this time too.
The London-based Center for Global Energy Studies in a blunt message says oil prices are no longer being driven by the strength of demand, but “by a shortage of supply,” emphasizing prices will continue to rise over the remainder of 2007.
“Despite an additional one million bpd of OPEC oil production from the beginning of 2007, on top of the increase already expected from Angola, as BP’s Greater Plutonio project comes on stream in September, oil prices are expected to rise further over the two coming winter quarters (Base case),” argued the CGES monthly report.
The head of the US Energy Information Administration Guy Caruso is calling for OPEC to increase production in the second half of the year. Inaction by OPEC could cause global inventories to fall too low, he insisted. “They wouldn’t be dangerously low, but low enough to apply an upward pressure on prices,” Caruso warned.
The US Energy Secretary Samuel Bodman has also expressed concerns about high oil prices and the possibility that OPEC might not increase supply.
Billionaire investor Boone Pickens, who oversees a hedge fund worth over $4 billion at Dallas-based BP Capital LLC and whose bullish bets on energy have propelled him into the Forbes list of the richest Americans, believes crude oil prices could surpass $100 a barrel in the case of “geopolitical events.” He cited a “worst-case” scenario in case the US pulled out of Iraq.
However, even barring such events, “oil prices will be $80 before I am 80,” Pickens said, noting that his 80th birthday is next May.
CIBC World Markets in a report says that the growing demand would push crude prices to $80 a barrel this year, and to $100 by the end of 2008.
US crude price could top $90 a barrel this autumn and hit $95 by the end of the year if OPEC keeps oil production capped at current levels, Goldman Sachs said in a report issued last week. “We believe an increase in Saudi Arabian, Kuwaiti and UAE production by the end of the summer is critical to avoid prices spiking above $90 a barrel this autumn,” Goldman Sachs argued.
Deutsche Bank AG last week also raised its “long-term” oil price forecast to $60 a barrel, from $45, saying that the outlook is “extremely bullish.”
The International Energy Agency is underlining that OPEC rigidity (in not increasing supplies immediately) could bleed the market.
The pressure is emanating from all quarters and is starting to take its toll. Signals emerging indicate a thawing in the OPEC position. “If the oil market needs it, OPEC will inject more oil into it,” Javad Yarjani, the head of OPEC affairs at Iran’s Oil Ministry, said in the first hint that OPEC is ready to push more crude in the market. Qatari Oil Minister Abdullah ibn Hamad Al-Attiyah added: “OPEC should move when there is strong evidence that there is a shortage in crude supplies.” Even OPEC President Mohamed Al-Hamli admitted: “We are concerned about the higher price because we don’t want to go through a recession.”
OPEC’s reluctance to produce more oil is not much difficult to understand, especially, if one examines the organization’s assumptions about future non-OPEC oil supplies.
OPEC takes a much more optimistic view about non-OPEC oil production than the CGES, or even the IEA. OPEC sees non-OPEC oil production rising to 51.2 million bpd by the final quarter of 2007, yielding a year-on-year increase of close to one million bpd, and sees a further one million bpd, non-OPEC output increase in 2008, considerably higher than the CGES forecast of just 0.5 million bpd and 0.7 million bpd respectively for 2007 and 2008.
OPEC also appears to be taking note of possible US legal action against its members on grounds of price manipulation and would therefore prefer to adopt a wait-and-see policy.
The world’s drive to conserve energy has also given OPEC further justification for its cautious approach to bringing on new oil — even at the risk of a widening gap between supply and demand — some say.
Saudi Arabia has repeatedly signaled it might not be necessary to boost potential output above its targeted 12.5 million barrels per day if consumers meet their goals of greater energy efficiency and reduced dependence on oil. Many now say the Kingdom is right to exercise caution. “It seems perfectly rational for Saudi Arabia to state that it will not invest without consideration of demand,” said Paul Horsnell of Barclays Capital.
“Consumer countries are telling OPEC to invest at a faster rate, but they are simultaneously talking of drastically reducing their oil imports and pursuing a highly petrophobic energy agenda,” he said.
And thus, within days of an International Energy Agency warning of a global oil supply squeeze over the next five years, OPEC said the group would be forced to closely monitor the challenge from rival biofuels. Rhetoric, unfortunately political rather than practical, seems to have impacted the psychology of the producers. This, one has to underline, could disturb the global crude demand-supply dynamics.
The entire energy fraternity from Samuel Bodman to Claude Mandil and Ali Al-Naimi to Ambassador Arne Walther all need to get into action, to take care of this emerging perception within this producers’ camp — at all cost — before it is too late.
