It may not be panic — as yet — but emergency seems imposed. These are uncertain and turbulent times for both, the producers and the energy industry. An increasingly dismal outlook for the global economy has sent crude oil prices into a tailspin, and there appears little the Organization of Petroleum Exporting Countries (OPEC) can do. However, it cannot — and should not — be a mere spectator to the emerging scenario. And at this moment it even does not enjoy the luxury of time. OPEC needs to act rather urgently and that is exactly what it seems to be doing when it meets, rather informally, in Cairo on the sidelines of OAPEC meeting tomorrow.
Market confidence about crude demand projections under the onslaught of the continuing bad news, seems dwindling. The question remains with oil already at around $50 — could $30 a barrel is far away? World oil prices could easily slip toward $40 or perhaps $35, analysts and economists concede. “How low prices go is rather random: $50, $40, $35? It could be any of those numbers,” Kevin Norrish, analyst at Barclays Capital in London rightly says. “Maybe $50 is conservative given the putrid, putrid look of the economy. If we’re not out of the doldrums in nine months from now, we’re looking at $30 oil,” analyst Stephen Schork underlines.
The demand destruction is real. The global demand growth forecast for 2009 has now been cut to nearly half the earlier estimates, OPEC’s latest report said. World oil demand for 2009 is now expected to rise only by 490,000 barrels per day, significantly lower than the previous 760,000 bpd estimates. Things are getting worse by the day.
Just as investors were overly exuberant when prices were climbing to $147 a barrel this spring, they appear to be excessively pessimistic in the current price slump, believes Adam Sieminski, chief energy economist at Deutsche Bank AG.
Uncertainty is definitely ruling the crude world, adding to the woes of the exporters. “Day by day, forecasters are lowering their forecasts for prices next year and there is just a tremendous amount of uncertainty,” Judith Dwarkin, energy economist with Ross Smith Energy Group emphasized.
The scenario has forced OPEC to hold its third meeting in recent months. After its regular meeting early September, situation forced OPEC to convene the extraordinary ministerial on October 24, much before initially scheduled. But despite the output cut markets failed to respond, resulting in further calls for output restraint. This was despite the fact that OPEC did make a convincing start in complying with the agreed output cuts agreed, analysts and shipping brokers felt.
The emerging scenario “has put a gun to their (OPEC) head. That’s why they’re meeting (in Cairo),” underlines Mike Wittner of Societe Generale. Conflicting signals seem to be emanating from within OPEC ranks on the mood of the delegates before the Cairo moot. “OPEC needs to cut more rather than less — probably in the range of 1.5 million,” an OPEC delegate told Reuters. “Demand is going down every day along with the price and we don’t want a big stock-build.”
Action should be taken to halt a decline in oil prices, Libya ‘s OPEC representative Shukri Ghanem opined last Friday. The group should examine whether the fall in prices was the result of weaker consumption in oil importing countries or of speculators liquidating their positions in the market, Ghanem added. “The oil market needs some kind of action,” he stressed adding: “Of course the falling price hits our earnings, but we’re not worried because it can’t last. We expect a turnaround.”
On Monday, Iran called for more cuts in oil. “Of course, market prices show this OPEC measure (from Nov. 1) was also not able to prevent a fall in the oil price,” Iran ‘s OPEC Gov. Mohammad Ali Khatibi said in remarks published in Iran‘s Resalat newspaper on Monday. “Therefore, to prevent this trend, it is necessary for OPEC to make a further reduction.” Although Khatibi conceded it was not certain if any cut would be agreed in Cairo. Iran has previously said it wanted OPEC to remove up to a further 1.5 million bpd, in addition to the Nov. 1 reduction.
“Venezuelan Oil Minister Rafael Ramirez emphasized, “We believe there should be an additional cut of one million barrels per day.”
However, OPEC President Chakib Khelil preferred to remain noncommittal. “It would be better to wait until the December meeting in Algeria to act,” he said. “In Cairo we will not have the complete data about the market,” Khelil said.
Analysts seem divided on the possible meeting outcome. Eight of 15 oil analysts surveyed by Reuters earlier the week said the OPEC was unlikely to announce any reduction at its informal gathering in Cairo.
“OPEC will probably sit on the fence and wait until their meeting in December before adjusting production,” said Harry Tchilinguirian of BNP Paribas in London. “Until the full impact of the cuts on Oct. 24 can be properly assessed, it will be difficult for OPEC,” said Julian Lee, senior energy analyst at the Centre for Global Energy Studies.
The Saudi stance on the issue, so essential for gauging the outcome, is also not known yet. “So far, it appears that the Saudis would prefer to wait until the regular Dec. 17 OPEC meeting before announcing the cuts,” Robert Johnston, an energy analyst at Eurasia Group underlined.
“However, a high level of compliance with the October cuts and the continued price collapse likely increases Saudi willingness to take on further cuts, whether in November or December,” Johnston added.
However, several others anticipate a cut, arguing OPEC cannot wait any longer. Rob Laughlin of MF Global was quoted as saying that the market would respond badly if OPEC left Cairo without a cut. “To go into that meeting and come out empty-handed would certainly produce lower prices. To do nothing is not an option,” he added.
The frequent OPEC meetings in recent months however, send one definite signal: The OPEC is determined to act as it did when prices went below $10 a barrel in 1998. “They’re fairly agile. They can do a lot. We have seen it before in 1998,” analysts keeping an eye on the situation emphasize.
These are difficult time for the OPEC now on. The grouping has an arduous task in hand and it has to use all its wits and energies to get out of the scenario. After all fair return is an inalienable right of the producers’ too; one cannot help underlining at this stage.
