Crude markets are in the midst of a violent correction, with Brent having already touched the half mark since the peak of $ 147.50 attained on July 11. The pace and volatility of the decline has surprised many. David Fyfe, senior oil analyst for the International Energy Agency in Paris, believes “the volatility has been quite marked.”
A new era of aggressive market management is on anvil and seems inevitable. David Kirsch of PFC Energy, the Washington consultant firm, thinks that with demand falling, OPEC is entering a phase of much more active management of the oil markets, including more frequent meetings.
Softening crude markets are also highlighting another crucial aspect — the sordid role of the speculators in taking the markets to the dizzying July heights. With prices falling, the speculators are apparently taking the money out of the energy markets and in horde, it now seems. “As demand fell, so did prices, and as prices have fallen, investors have begun pulling money out of the oil market, fearing a collapse,” says Leila Benali, of the Cambridge Energy Research Associates, adding: “People are getting nervous about demand next year. There is talk of a global recession.”
Investors who earlier this year piled into oil and other commodities, as a hedge against inflation and the weak dollar, now want safety. “Commodity indices suffered heavy losses over the past week as market sentiment continue to focus on the potential demand-side weakness associated with the ongoing instability in the financial sector,” Barclays Capital said in a recent note.
Market fundamentals have really not been very bad all these past months, the OPEC kept insisting and the falling prices once again underline that OPEC had a point. One needs to take OPEC rather more seriously than is generally accorded!
And now the issue of over supplies!
Indeed the Iranians, the Libyans, the Qataris, the Venezuelans and some others have been striving to drive this point for the last few weeks now. Being the No.1 within the producers grouping, Saudi Arabia is still quiet, avoiding to take position in public glare — understandably so.
Yet the facts are bare open.
The 13 members of the Organization of the Petroleum Exporting Countries pumped an average of 32.47 million b/d of crude in September, 340,000 barrels per day less a recent Platts Survey confirmed. “At Platts, we are seeing increasing signs of crude and products going unsold on the market,” said Platts Global Director of Oil John Kingston.”
This is a significant admission!
And the situation is getting grimmer — from the oil producers’ perspective — with each passing day. It was just a year ago — on Oct. 12, 2007 to be exact — that Brent North Sea crude was last trading at as low as $75 a barrel. Today the situation is back to square one. This is definite to raise alarm bells in some — if not all — the OPEC capitals. All of a sudden it is no more than rosy for the exporters, as it was until a couple of months.
And to add to their woes, just as global demand has begun to slow, millions more barrels of oil a day from new fields are also to hit the world market. And mind it, the recent addition to capacities have been made at a cost an exorbitant one.
Big oil producers have reasons to be nervous. The ghost of disastrous OPEC meeting in Jakarta in 1999, when the grouping opted to raise its production levels, continues to haunt them. And within weeks of the disastrous decision, Asian stock markets tumbled, driving world oil prices down to as low as $11 a barrel.
And For oil-producing countries, not only are prices going down, but also their money in the banks, their investments, all are threatened by the current financial crisis, Libya’s Oil Minister Shokri Ghanem underlined in an interview. And he had a point.
And thus when the IEA, the energy policy adviser to major industrialized countries, cut its forecast for demand in the 30-nation OECD area this year by about 360,000 barrels per day, it is damn serious indeed.
The overall demand at the global level for the year was also reduced y the IEA to 86.5 million barrels per day — a reduction of 240,000 barrels from the previous estimate. The global consumption forecast for next year was also cut by 440,000 barrels per day to 87.2 million barrels per day, showing an annual increase of 0.8 percent.
OPEC could not have remained a silent spectator, oblivious to the emerging scenario, forcing it to convene an emergency meeting on Nov. 18 — still a month from now. “The organization is concerned about the deteriorating economic conditions with contagion risks,” OPEC said in calling for the rushed confab.
But not every one seemed to condone the OPEC decision. OPEC would be misguided in the extreme if it were to cut oil production in an attempt to boost oil prices as the Northern Hemisphere heads toward winter and global inventories remain tight, the London-based CGES says in a report to its clients.
British Prime Minister Gordon Brown, scheduled to hold an energy mega event in December, believes a cut in output reportedly being discussed by producing nations would be “wrong for the world economy”.
“I’m concerned when I hear that the OPEC countries are meeting, or about to meet, to discuss cutting production, in other words making the price potentially higher than it should be,” he said. It would be “wrong for the world economy ... for OPEC to cut production and therefore keep prices high,” he added.
Politics seems at play.
However, despite the convening of the OPEC emergency meeting and speculation that output could be cut, the free fall continues. The malice seems deeper. The issue of putting a floor to the bottom is back into play. “OPEC appears to be scrambling to put in another, firmer floor at $80,” said Jonathan Kornafel, Asia director of US-based options trader Hudson Capital Energy.
To what extent OPEC succeeds in its endeavors is anybody’s guess. There is still a lot of water though to flow until the meeting takes place; one has to keep in mind. Nov. 18 could definitely be another day!
