Oil
Market Outlook Mired In Confusion
By Adam Porter
22 August, 2004
Aljazeera
When
the oil market is under such pressure, statements by powerful players
can have a significant impact on prices. Saudi Arabia and OPEC are no
strangers to this game.
Looking back over
the past months, some observers see the host of statements to the press
as at best confusing and at worst politically motivated.
The recent announcement
by Saudi Arabia that it plans to raise output by 1.3 million barrels
per day (mbpd), was trumpeted across the media. Seemingly this announcement
was to ease market pressure and prices. Yet the actual wording of the
announcement is less clear.
Oil minister Ali
Naimi said, "The kingdom is well prepared to meet all the requirements
of the international oil companies if they need additional volumes."
In the geopolitical
world, where lawyerspeak dominates discussions, does this mean that
Saudi Arabia is actually producing an extra 1.3 million barrels per
day? Today? Or does it mean that they could produce an extra 1.3mbpd?
Or that in the future at some point they might produce an extra 1.3mbpd?
Surely only the first interpretation is worthy of a press release to
the world's media, the other two are simple speculation. Because theoretically,
with 130 billion barrels of "proven developed" reserves, Saudi
Arabia could produce huge quantities of oil. This does not mean that
they are producing, or will do so in the future.
"I don't know
a single person who believes the Saudi line," oil analyst Bruce
Evers of Investec Securities in London told Aljazeera.net.
"The Saudis
are desperately trying to dampen the price ahead of the [US] election
in November. They are using all the cards up their sleeve."
"They were
still reeling from the price drop of the late 1980s and ... have underinvested
in their production capacity. Now demand growth has caught them out"
The announcement by Saudi Arabia overshadowed a near simultaneous release
by the International Energy Agency (IEA). The IEA announcement was in
the morning, the Saudi announcement in the afternoon. Of the same day.
The IEA report made
less calming reading for the markets. They claimed that global consumption
had risen by 2.4mbpd in 2004. In one year. And that next year, 2005,
it was set to increase by another 1.8mbpd. A cumulative total of 4.2mbpd
extra in just 24 months.
So where does Saudi
Arabia's "preparedness" to supply an extra 1.3mbpd fit into
that equation? Why did Saudi release this idea to the press a few hours
after the IEA report? Coincidence?
"It smacks
of desperation on the part of the Saudis," says Evers. "I
have no sympathy with them. They were still reeling from the price drop
of the late Eighties and as a result have underinvested in their production
capacity. Now demand growth has caught them out."
But if you think
this one Saudi statement is a little confusing, then you are yet to
enter the maze of predictions, announcements and statistics that further
obscure both the Saudi and OPEC promises.
On 3 June OPEC announced an increase of production. By 2mbpd from 1
July and then by a further 500,000 bpd from 1 August. Both deadlines
have now been passed and the price of oil has not neither held at its
June price of around $38, nor fallen. Instead it has increased to over
$46. Yet all the extra irritants to the markets - Yukos, Iraq, Nigeria
and so on - were very much around in June.
This would be destabilising
enough if it were not for another OPEC release on 22 July in Vienna.
In addition to the
two proposed increases in output, spokesman Indonesian Oil Minister
Purnomo Yusgiantoro told the world's press that OPEC was in fact "currently
producing some 2mbpd above the agreed ceiling. This should not be seen
as a violation of our production agreement, but instead as a positive
... to the current market situation".
So according to
OPEC itself, its members are already quota busting. Which they say should
"not be seen as a violation of our production agreement".
They say they are producing more than they agreed anyway.
So, does the 3 June
announcement of an increase of 2.5mbpd include this quota busting? If
it does that means that OPEC had huge, previously unstated, spare capacity.
If so, why are prices still so high?
"[OPEC's current
output]should not be seen as a violation of our production agreement,
but instead as a positive ... to the current market situation"
Or does it mean that OPEC countries were actually only adding 500,000bpd,
which is far more worrying for the markets. Judging by the price increase
since 3 June, it would appear the financial institutions, who bank on
oil, see it as the latter.
Of course, although
all oil-producing countries would deny it, could there be some incentive
for quota busting when prices are so high? Such as making hay while
the sun shines?
As a basic guide
at the start of the year, Saudi Arabia claimed a daily production quota
of 8.5mbpd. At the end of May following a call from the G8 to produce
more, straightaway Minister Ali Naimi said an "extra 600,000bpd"
were to be produced.
That would take
the Saudi output to 9.1mbpd. This was followed by the most recent Saudi
announcement of another possible 1.3mbpd. That would take Saudi Arabia
to just under 10.5mbpd which everyone, Saudi Aramco included, agrees
is their maximum possible output.
But where does that
leave the last two OPEC production hikes announced on 3 June? Where
does it leave the admission of quota busting? Are we to believe that
Saudi Arabia did not contribute to any of the OPEC production increases?
Then who did?
"Basically
demand growth has caught them on the hop," says Evers. "If
the IEA are right and demand continues to grow around 1.5mbpd over the
next five years, they are going to have to find in the region of another
7mbpd. That is going to be a real struggle. But in the past five years
the IEA have also consistently underestimated demand."
Now, as prices hit
$47 - a record - the latest OPEC announcement on 18 August is even more
difficult to work out. They now say output has been "increased
by 599,000bpd in July".
Is that 600,000
(announced in May) plus 2.5 million (announced on 3 June) plus another
599,000? Plus two million quota busting? Plus some more from Saudi Arabia?
Why did they announce increases of 2mbpd from 1 July and now say it
was only 599,000?
With such a plethora
of conflicting announcements, it is little wonder the markets remain
so volatile.
Estimates of Saudi
reserves are also fuzzy. On 27 April 2004 Abdallah Jumah, President
and CEO of Saudi Aramco, speaking to the Centre for Strategic and International
Studies and US-Saudi Arabian Business Council, said that the Saudis'
"proven reserves" were "260 billion barrels.That's with
a B".
Yet just a few days
ago, recently retired executive vice-president of Saudi Aramco, Sadad
Al Husseini, said "proven reserves" were "130 billion
barrels". Presumably also "with a B".
Yet in April Abdallah
Jumah went on to claim that Saudi estimates "of future oil reserves
could well reach in the range of 340 or 360 billion barrels. And based
on our current production rate, that translate(s) into a resource to
production ratio of more than 110 years".
If he is right we
have little to worry about. But although OPEC, the Saudi government
and Saudi Aramco's multiple announcements all say there is no problem,
there is a major one. The market simply does not believe them.
"I think oil
prices are going to stay high for a lot longer than is assumed,"
Bruce Evers concludes. "The question marks over the ageing Saudi
fields and the promises of spare capacity are going to mean a lot of
sweaty people, because the figures just don't stack up."