Hurricane Ike may have passed, yet another hurricane of much greater, wider and disastrous dimension — of a global economic meltdown — is now up on the horizon.
And the crude markets could not remain oblivious to these ominous developments. Hence it tumbled, flirting with low 90 levels currently on real concerns that turmoil on Wall Street would weaken the global economy and scuttle demand. And in their stride, crude markets seemed to have shrugged off two major events, Hurricane Ike — its impact on the energy infrastructure in the US Gulf coast — and the OPEC call to rein in over production.
In the wake of the OPEC decision to curtail production, and the heated discussion on the issue that went inside the conference room in Vienna, some pundits have already started issuing the death warrants of the oil grouping. With the Saudi standing by their stance of keeping the markets well oiled, interesting opinion pieces could be seen all around, especially in the western press.
And this is nothing new. We’ve been down this road before. Many a times in the past too such projections and predictions were made. And yet the OPEC wriggled out of all those scenarios too, rather successfully, and all indications are that the organization would put the pundits on floor — this time too.
Let’s look at what the Saudis have been saying. Quoting a senior OPEC delegate, The New York Times earlier the week said, “Saudi Arabia will meet the market’s demand. We will see what the market requires and we will not leave a customer without oil.”
Does it, at least philosophically, differ from the OPEC stance? Even hawks within the group maintain they were forced to act, only because of lack of demand. After all, OPEC cannot be a spectator to oil markets collapsing. Its stated objective is to keep it stabilized — at a certain level.
Is this different from the Saudi stance? On a closer look, the answer seems a firm no. Saudis too do not want the markets to collapse. Saudi Arabia may differ with Iran, Libya and Venezuela, the so-called hawks within the grouping, one cannot deny. Yet the fact remains that at the same time, it has been resisting the undue US pressure on the issue too.
All these turbulent months, Riyadh kept its cool, keeping its long-term interests in firm view. Business remains supreme in this high profile game, Riyadh knows it very well.
Closely analyzed, even the OPEC communiqué was quite bearish for prices. It talked about “a weakening world economy” and “concomitant lower oil demand growth.” And in the wake of all these developments, and despite all sort of reports to the contrary about the Saudi policy about output, the International Energy Agency, the Paris-based watchdog, reported Saudi production at 9.46 million barrels per day for August compared with the long time high of 9.7 million produced in July. Some adjustments to the markets demands may have already been in operation, it now seems.
Others too did not feel much differently. Mike Wittner, energy analyst at Societe Generale, referring to the political pressures on leading OPEC producers, especially from the Western economies says, “There are political considerations and Saudi Arabia and other moderate OPEC members have a genuine concern that while higher oil prices didn’t cause the economic slowdown, they are an extra weight on the economy.” Though, he added, he expected Saudi Arabia would eventually cut output.
Shokri Ghanem, head of Libya’s state oil company, who has repeatedly said the market was in danger of becoming oversupplied, also insisted to Reuters last Thursday that OPEC, would cut. And the markets also did not react otherwise to the OPEC decision, as some had projected, underlining the fact, ‘the market is oversupplied.’ After briefly rising by a dollar following the OPEC decision, oil prices continued going down, aided by the global economic woes.
And the current financial turmoil notwithstanding, already there seemed a good chance that prices would continue to fall. On September 10, analysts at Barclays Capital, long time bulls on oil prices, slashed their forecast for the average price for the 2008 fourth quarter, from $123.90 per barrel to $97.50 — major reduction indeed.
Market dynamics have changed — at least for the time being — and everyone within OPEC is alive to the new, emerging realities. The Saudi balancing act in the energy world, amidst contrary and conflicting pushes and pulls, needs a special mention here. The Saudi actions not always represent political considerations, as some are hell bent upon underlining. In most cases pure business logic, and that too the long-term, drives that.
If Saudi Arabia has been playing a balancing role, endeavoring to calm the oil markets and curbing unjustified rise in prices, it was basically in view of its long-term interest in the market. Riyadh definitely does not want to harm the economies of consumer countries, contributing to demand destruction, signs of which are already there.
This would be suicidal for the oil exporting countries. Riyadh is there on global energy map for many more decades to come and thus has an innate interest in keeping the consumers rely on oil as the main source of energy. Saner minds could not contest these objectives. And no one could deny Saudis of behaving rationally, rather than irrationally, all these months and years.
