Is
OPEC Losing Control Over
Oil Price?
By Adam Porter
25 September, 2004
Aljazeera
Despite
the best efforts of oil's major players, barrel prices are once again
touching record highs.
Global petro-luminaries
such as OPEC's chair Purnomo Yusgiantoro, Lord Browne of BP, Saudi Aramco
and others have insisted there is no problem with supply.
Yet their words
have been routinely ignored by the traders.
For the first time
in 16 years, US commercial inventories dropped for eight weeks in a
row. The markets had expected a fall of around five to seven million
barrels. Instead, the drop was 9.1 million.
Arguably even worse,
other distillates and heating oil inventories also fell. This prompted
more market rumours of a release of US Strategic Reserves, a measure
Vice President Cheney said would only happen in "a national crisis".
Yet recently Yusgiantoro
told the World Energy Congress in Sydney there was "enough oil
in the market" and that global production was "1.5 million
barrels (per) day above demand". It appears the market does not
believe him.
"It's rubbish,"
says Bruce Evers, oil analyst at Investec Bank in London. "They
are trying to calm the market. If they say there is no spare production
capacity, prices will go through the roof."
Indeed, even basic
calculations must cast some doubt on OPEC's pronouncements. The International
Energy Agency (IEA) estimate global oil demand in 2004/05 will rise
by 4.3 million barrels per day (mbpd) - 2.5 mbpd in 2004 and 1.8 mbpd.
At a conservative
two year average that means the world is consuming at least 1,576,469.8
mbpd more than it was on 1 January 2004.
If one were to
take Yusgiantoro's figures as accurate, this would mean that at the
start of the year there was over three million barrels per day spare
capacity in the marketplace. Something no one believes.
"OPEC just
keep repeating the same old things over and over again," says Deborah
White, senior energy economist at Societe Generale in Paris.
"They say
'we cross our heart and hope to die that there is 1.5 million barrels
of spare capacity in Saudi Arabia'. But at the same time even (Saudi
Oil Minister) Ali Naimi says it is impossible to know.
"We also think
the International Energy Agency figures are on the low side. We go on
[figures of] 2.7 mbpd in 2004 and 2.5 mbpd in 2005."
Despite repeated
pronouncements about an increase in shipments, OPEC appears to be losing
its ability to influence the price of oil.
Its mid-September
AGM in Vienna promised further increases in supply, yet within seven
days prices had rebounded to within a few cents of record highs.
"There can
be more production from Africa and the Far East, the Middle East and
especially Saudi Arabia. But the real question is whether they will
invest quickly enough to do it
at a sensible speed"
"It is no longer
within the power of OPEC to keep prices at $28 a barrel," says
Societe Generale economist White. "OPEC can only set the floor,
not the ceiling."
Investec Bank analyst
Evers agrees. "These US inventory figures tell me that Saudi is
struggling with light crude [production]. The stocks that they said
would make it to the markets just don't seem to be appearing and demand
is far far stronger than the figures say. It's a fact of life. This
doesn't bode well."
In part these high
prices are spurred on by the effects of Hurricane Ivan in the Caribbean.
Indeed, traders may have yet to fully price in the full effects of the
rogue storm, some of which are still unfolding.
On Wednesday the
US Interior Department announced that seven oil platforms in the Caribbean
were completely destroyed, with four sunk.
As well as these
seven, another 13 are currently leaking their precious commodity into
the sea. It could hardly have come at a worse time.
Because, in addition
to the almost comic aspect of Nigeria admitting that two impounded tankers
accused of oil smuggling "have disappeared", China has continued
to announce an increase in imports.
The Chinese Government's
General Administration of Customs quietly announced a 39.2% year on-year
rise. That is around 2.21 mbpd.
Although Chinese
and Indian oil demand growth does appear to be slowing, the uncertainty
alone will only fuel more price fears. As will the crisis at Russian
producers Yukos.
"There can
be more production from Africa and the Far East, the Middle East and
especially Saudi Arabia," says White of Societe Generale. "But
the real question is whether they will invest quickly enough to do it
at a sensible speed.
"As well as
that majors like BP, Shell and Total are still investing in new production
as if oil prices were still at $20 or $22. Their shareholders are demanding
returns, which means less investment in new fields."
There may be some small help on the horizon. Some refineries, where
crude is turned into petrol and/or stripped of its impurities, are in
the process of their annual maintenance.
Others are changing their modus operandi to take in some of the heavier,
more sulphurous, crude currently being offered at a discount by Saudi
Arabia.
"There can
be more production from Africa and the Far East, the Middle East and
especially Saudi Arabia. But the real question is whether they will
invest quickly enough to do it
at a sensible speed"
Yet even so the
OPEC price basket of $22 to $28 per barrel seems increasingly like a
historical artefact.
"And no one
really wants the heavy crude," Evers says. "It's just too
expensive to convert. Basically, in the current oil market there is
absolutely no room for error."
Even if new refinery
measures brought short-term comfort, the problem remains that global
supply is close, if not matching, global demand.
Previous disruptions,
even sinking rigs and broken pipelines, could be coped with when there
was in excess of 5% spare capacity. Not now.
"We saw a
drawdown in stocks in every single US region, not just the Gulf Coast
and those affected by Hurricane Ivan," says White.
"With these
high prices that exist now oil refineries do not want to spend money
buying in crude that they are not going to use straight away.
"They want
to have exactly the right amount to fulfil their just-in-time operations.
And there is no spare refinery capacity, demand has outstripped all
expectations."
Repeated promises
of increased production by Saudi Arabia and OPEC have failed to calm
the markets. Some even doubt those production increases have occurred
at all as inventories fail to fill. OPEC has already admitted that its
members were breaking their own stipulated quotas.
Even by the IEA
demand figures, deemed far too low by analysts, the world needs to produce
another 2,723,530.2 bpd by the end of 2005 just in order to stand still.
Let alone create
spare capacity. Where that (and future projected IEA increases of around
1.5 mbpd after 2005) can be found, may become the central economic question
of the early 21st century. Maybe it already is.