The OPEC oil ministers are scheduled to meet in Vienna on March 17 to review market conditions and consider whether to change output levels. The visit would provide Secretary Chu, known for advancing the green cause, a rare opportunity to relay in person the US position on the group's production and also to ascertain the current thinking in OPEC corridors. Indeed some hint - and not without reason - he could demand to keep output at least at current levels. Definitely pressure is being exerted on the producers. This is the name of the game.
And this is despite the fact that even with demand surging in China and a protracted and widespread spell of cold weather across much of the Northern Hemisphere, the global crude outlook remains far from certain. We are today in an environment marked by little signs of underlying growth in OECD (Organization for Economic Cooperation and Development) oil demand, coupled with Asian product surpluses also appearing and moving into the Atlantic Basin. And in the light of the prevailing indications, it is indeed difficult to see much support for higher oil prices, the London-based Centre for Global Energy Studies (CGES) said in its February Monthly Oil Report, to be released officially on Monday.
A number of other issues are also impacting the global crude markets. The CGES report also emphasizes on the financial side of the global energy equation, especially since the US Dollar has been appreciating against the euro since the beginning of December. And in the meantime, the markets too have become increasingly concerned about the debt problems of Greece and poorer than - expected 4Q, 2009 GDP figures for Germany and Spain.
Although there is little talk "yet" of a "double-dip" recession, fears are mounting that the pace of economic recovery in the euro zone will be extremely slow, increasing the investors' appetite for the US dollar. And this increased appetite for the US dollar among investors could also begin to put downward pressure on oil prices.
Market fundamentals are also weighing in on prices. Supplies from non-OPEC producers and OPEC NGLs and other liquids are expected to rise by nearly 1 million bpd in 2010, offsetting most of the expected demand growth. Global inventories are projected to rise sharply in the second quarter, despite heavy maintenance, after a modest fall in the first, the CGES report projected.
BP chief economist Christof Ruehl also believes that huge price spikes, like the $147 a barrel seen in summer 2008, seems unlikely. The reduction in OPEC output quotas, which amounted to 4.2 million barrels a day, was the main driver of the price increase last year, Ruehl said. It will take more time for faster economic growth to push prices up further, he said.
"Even if the good years were to return tomorrow, then too it would take three years to burn through this excess capacity and bring it down to a level where it was before the crisis of "08," Ruehl said. "That means in the foreseeable future, the next two or three years, sudden oil-price spikes are unlikely."
The strategic direction of the producers' and the consumers' seem to be moving in the opposite directions - a tug of war may not be completely written off. The visit of Secretary Chu could be the first shot in that direction.
There are other problems mounting for OPEC too. Earlier the week the BP chief economist also underlined that inventories should return close to normal levels from their current historical highs by the summer, provided the OPEC maintains quota discipline. However, Christof emphasized that the prospects of OPEC continuing to maintain quota discipline was difficult.
The OPEC's ability to maintain cuts in oil output will probably weaken further as crude prices recovers, Ruehl added.
"When we have high prices, and when you have that price with spare capacity, it increases the incentives to sell oil through the back door," Ruehl said earlier in the week. "Historically this is always what has happened. I expect to see that again at some point, but nobody knows when."
This is going to be a painful process within OPEC. Compliance with output quotas has already slid to 58 percent in January from 61 percent in December, the International Energy Agency estimated. With the global energy balance seems preparing to enter a new phase, the issue of quota compliance could assume greater importance. Already the issue of peak oil has been pushed to sidelines and instead the peak demand mantra seems to be moving, albeit slowly and gradually, toward the center stage.
Oil demand has been on the decline in some industrialized nations since before 2008, when a sharp downturn first gripped the global economy. Since then, the downturn has continued and the trend of falling oil demand has expanded to the US, the world's top oil consumer. Currently, the economic crisis is seen as the foremost driver of declining oil demand. But some expect longer-lasting influences, such as a new emphasis on conserving fuel and energy in the US, to carry the downward trend decades into the future.
In its monthly report, the International Energy Agency noted that the economic recovery could very well come without a recovery in oil demand in the OECD nations, warning that OECD demand has peaked."
And if oil demand has peaked in the developed world, oil producers have a lot to worry about-OECD nations will account for 53 percent of world demand in 2010.
In the wake of the coming battle, OPEC needs to stabilize and restore sanity within its own ranks - one can't help pointing out.
