Lagniappe

 

 

John Hall :The OPEC dilemma for today

With the price of oil falling short of $100, having virtually trebled in just four years, consumer attention is focussed on OPEC and repeated demands are calling for more oil but, from OPEC’s view, the world is not short of oil and there is nothing for OPEC to do. Can OPEC act and if so what should it do? The current Summit may not the required setting for any such action but it is certainly provides an opportunity that should not be missed.

Three years ago, OPEC was satisfied with $30 for the OPEC basket price and then in 2006, OPEC was satisfied with the price range of $50 to $60. Today OPEC has around $85 to $90. Since the US led invasion of Iraq in 2003, the price of oil has increased by nearly 200% while the dollar has fallen against sterling by 30% and against the euro by 34%. The gain to oil producers from the higher oil price more than offsets any loss from the weakening of the dollar.

Last year OPEC announced that it would cut back oil production and by early in 2007 the market perceived that shortages would follow, particularly in Q4 this year.

Supported by geo-political tension in the Middle East, concern over weather conditions in the Gulf of Mexico and latterly concern over extra cold weather in the US and Europe, the price of oil has risen to over $90 for the OPEC basket and close to $100 for the US WTI. OECD inventories are lower than expected and at a time when they could normally be expected to be above levels for previous years.

Demand for non-OECD countries will continue to increase as business opportunities will be transferred to them from the OECD countries while, from the environmental aspect, the emissions will be transferred too from countries where they are an issue to countries where they are not.

There is a perception in the market that with a shortfall of product at the start of the supply chain, OPEC, that any further shorfalls or disruptions that occur further downstream can not be supported upstream. OPEC produces 40% of world oil supplies while the observers that follow OPEC produce a further 20% giving a combined output of 60%. OPEC, with or without the observers, has the power and the strength to influence the market by offering further supplies of crude on to the market. If the product is not taken up, OPEC will have proved that its own analysis is correct and the market will indeed have to look to itself for a solution to high oil prices but sustained prices above $60 will certainly have severe long term implications for world economic growth.

OPEC is calling for demand security yet needs to recognise that high oil prices impact negatively on demand, as we are seeing today. OPEC says that is is a “price taker” not a “price maker” yet OPEC actions over the last twelve months have most certainly influenced prices and it now needs to take further decisive action to influence and correct the price and inventory imbalance. Does it accept this challenge and if so, when will it respond?

 

John Hall is Fellow of the Energy Institute, a Member of the Market Research Society and an Associate Member of the Chartered Institute of Purchasing and Supply, is the Managing Director of John Hall Associates Limited a firm specializing in energy procurement solutions. (John Hall +44 (0)7785 274530 ). Petroleumworld not necessarily share these views.

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Petroleumworld News 11/15/07

Copyright© 2007 John Hall. All rights reserved.

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