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Catherine Hunter / Global Insight : OPEC puts out
cautionary feelers ahead of September meeting
OPEC has given notice in its latest monthly market report that its attention is fixed on the potential for an increase in crude inventories, given softening OECD demand growth, improved non-OPEC supply, and increased OPEC production—planting the idea of official or unofficial production cutbacks at its September meeting.
Global Insight Perspective
Significance
With OPEC ministers due to meet on 9 September, the mid-August market report is the organisation's last collective official word on perceptions of market conditions before attention turns to supply quota policy for the fourth quarter.
Implications
The overall tone of the report is bearish, highlighting the potential for a sharp build-up in crude oil inventories, a market structure (contango) supportive of stock-building, and at the heart of it ”current production levels well above [our emphasis] the expected demand for OPEC crude”.
Outlook
There remains some time to run before the meeting, although Saudi Arabia's unilateral production increases earlier in the year are likely to take a central role in strategy come September, offering some potential for unofficial production reductions without running the risk of international opprobrium over more transparent cuts.
Groundwork Laid
In OPEC's latest monthly oil market report, and its last before OPEC ministers meet on 9 September, the tone is largely cautionary about the current oil market balance, highlighting the potential for a sharp build-up in crude oil inventories, a market structure (contango) supportive of stock-building, and at the heart of it ”current production levels well above [our emphasis] the expected demand for OPEC crude”.
The report does identify upside risks from hurricanes, colder weather, and geopolitical developments, but overall the organisation has made its fifth downward adjustment in global demand in as many months, reducing consumption by 30,000 b/d to 86.9 million b/d for 2008, from 85.9 million b/d in 2007. That brings it to exactly the same 2008 global demand figure as that put forward by the IEA. The two organisations are also now aligned on their forecasts for 2009 demand, at 87.8 million b/d apiece.
Of the major consumption areas, Chinese demand is seen at 8.45 million b/d by OPEC, compared with the IEA's 8.42 million b/d, while the major non-OECD areas are nearly all slightly lower in OPEC's forecasts, with Middle East at 7.07 million b/d, “other Asia” at 9.5 million b/d, Latin America at 5.85 million b/d, and the former Soviet Union at 4.14 million b/d. What pulls OPEC's estimate up is its view on OECD demand, which is seen at 48.58 million b/d in 2009 (down from 48.86 million b/d in 2008), compared with the IEA's forecast of 48.05 million b/d in 2009 from 48.57 million b/d in 2008. Within that, North American demand is central to the disparity, with OPEC assigning North America 24.97 million b/d of demand in 2009, a retreat of 0.9% from 2008's 25.2 million b/d, while the IEA expects North America to account for 24.51 million b/d of demand in 2009 from 24.88 million b/d this year.
On the supply side, OPEC continues to see non-OPEC supply up 950,000 b/d in 2009 from 50 million b/d in 2008. The IEA is more bullish for 2008, with non-OPEC supply seen at 50.75 million b/d, according to its August report.
Outlook and Implications
OPEC's report seems to have laid some of the groundwork for the hawks in the approach to the September meeting, with dramatic price retreats in recent weeks also likely to add support for quota revisions or unofficial cuts—unless hurricanes, stock data, and geopolitical problems in Central Asia feed through into more substantive gains. Arguably a more bearish story was told in the IEA report of a few days earlier, particularly on the North American demand side, where OPEC remains some 460,000 b/d higher in its 2009 demand forecasts. This too is likely to factor into OPEC ministers' thinking at the Vienna (Austria) meeting.
However, with oil prices remaining above US$100/b, and inflationary pressures stemming from energy, a key factor affecting economies in the developed and developing world, transparent production decreases will remain a tough international political sell without a significant retraction in prices. This makes the unilateral Saudi production increases earlier in the year a more likely target for cutbacks, avoiding public measures, while anticipating potential stock builds as a result of existing and new supply coming onstream through until end-2008, set against a more muted demand picture.
Catherine Hunter is Energy Analyst (catherine.hunter@globalinsight.com ). Petroleumworld does not necessarily share these view.
Editor's Note: For more information on Global Insigth, contact: Catarina Feria-Walsh Global Insight, catarina.walsh@globalinsight.com. www.globalinsight.com.
Recent accolades from USA Today, Reuters, and The Wall Street Journal confirm what third-party evaluations have shown again and again over the years: GLOBAL INSIGHT has the most consistently accurate forecasts. For details regarding our world-renowned accuracy visit: www.globalinsight.com/accolades
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Petroleumworld News 08/19/08
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