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Editorial / Commentary / Opinion
John Hall : OPEC rolls over, yet again!
The 156th. Ordinary Meeting of the OPEC Conference
Vienna, Austria, 17th. March, 2010
OPEC met today under the new Presidency of HE Germánico Pinto, Minister of Non-Renewable Natural Resources of Ecuador and President of the Conference for the current year. As with all OPEC meetings the market was awash beforehand with statements from all ministers although this time, each had the same point to make – no change! With the price of the OPEC basket being maintained over $75 irrespective of whatever OPEC says, the members are happy, for now.
In 2008 OPEC announced it would cut output by 4.2mbpd and actually managed to achieve around 80% of this figure albeit for a few months. Today compliance is just a little over 50% which does not speak well of OPEC discipline but with the OPEC basket price around the $75 level no one can blame the members for producing and selling as much as they can. OPEC is naturally aware that
fundamentals are not driving the market which also serves to confirm that it is not in control of prices but where the members have to be careful is if the price falters and starts to fall back, as they will then need to rapidly cut and not increase output to maintain revenue streams which is their normal solution.
OPEC appears to be working on output levels, as opposed to quota levels, and by leaving output where it is it is in effect just confirming that these levels are correct for now. I had expected quota levels to be adjusted to match output, to give some sense of compliance but this has been done many times before and may send out signals to the market that output has been officially increased. However, to leave the levels as they are, OPEC is not making a definite statement. OPEC is concerned at the massive OECD stock overhang which currently equates to 60 days as opposed to the 52 days that OPEC prefers. This figure will fluctuate during the next two years, and will also act as a very sound cushion to supply and price changes and, unless OPEC reduces output to comply with the quota cuts, it will remain at current levels probably until 2012. So, unless OPEC makes greater effort to rein in the over producers, which it probably won’t do or be able to do, the higher stock overhang will remain and provide genuine support against price volatility and curtail OPEC’s
control over the market.
Seasonal demand for OPEC oil will fall during the second quarter by as much as 1mbpd which will allow the stock overhang to replenish itself from winter draw downs. However, all focus is on resurgence from India and China later this year but it should be recognised that both countries are seeking to take more gas in place of traditional oil usage and furthermore, if world gas prices remain depressed with supplies abundant we shall see the consumers switching from one to the other. The US market has moved from being short on natural gas to very long, thanks to the advent of Shale gas and, as a further consequence, the US will not need to utilise the LNG stations built around the Eastern and Southern points of the US for LNG imports. Instead, the LNG will be available to both European and Asian markets and taken possibly in preference to oil.
As before, the emphasis is on global recovery and on OPEC being ready to respond as demand picks up but, at the same time, OPEC is very much aware that should oil prices rise much above current levels, OECD recovery could well falter and with financial tightening in China the global recovery as such is certainly not guaranteed just yet. Yet China remains the single, fastest growing market for oil with demand growth expected to rise 0.5 million b/d to 8.8 million b/d this year while the People’s Republic announced that the economy grew in excess of 10% in the final quarter of last year and now is predicted to grow at 9.0% this year according to the latest projections from the World Bank.
OECD countries are still not out of trouble and could easily fall back if oil prices rise much above $80, while the non-OECD sector not only depends on OECD support it also has to take care not to overheat itself. We can not ignore the fact that with high unemployment levels both within the EU and the US, respective governments are being overstretched with social security issues adding to public debt and will need some years before employment can return to more acceptable levels and relieve them of the financial constraints.Within the OECD countries much of the manufacturing sector has been relocated to Asia to make the goods that then OECD countries used to make and so any recovery within the OECD from manufacturing will not be able to recover to pre-recessionary levels. Meanwhile, demand for oil products has suffered certainly within the Western EU countries to the extent that it will not recover and return to original levels. As a result, oil companies are understood to be looking to reduce their involvement in the region which will in turn create
higher prices certainly for automotive fuels, transferring through to higher transportation costs which will ultimately be passed on to the consumers.
Ironically, in the EU, much of the gasoline produced is exported to
the US while Diesel fuel is imported from Russia.
Looking ahead to demand, the table below illustrates the EIA view of supply and demand and from this one can see that the market in 2010 will not even catch up with 2007 demand but will pick up in 2011 but with OPEC overproducing by 2mbpd now, and with the stock overhang increasing further, there should not be any supply concerns just yet.
Oil Demand
OECD Non-OECD Global Source: EIA Short Term Energy Outlook
In the background, the market is most certainly being driven by financial institutions, more concerned with the perception of five years ahead than the fundamentals of today. Last month, Richard Branson of Virgin Atlantic suggested that an oil crisis was probable in five years or so yet when I asked Mr. Pinto and Mr. El Badri for their views on this, and other such reports, Mr. El
Badri was absolutely adamant that no such shortage would exist with OPEC holding 80% of the world reserves and supplying 40% of world requirement.
One can always challenge such figures yet proof may be prove difficult until after the event! This was not perhaps a question of direct relevance to OPEC but it was an opportunity to question the administration on the strength of its supply base against such perceived concerns.
The meeting today was held in OPEC’s new offices and something that OPEC is very proud of, and rightly so.
Attendance by the media was good yet the questions faltered and from the outset there was a feeling of what are we all here for. There was some inevitable concern over geo-political tension and particularly the threat of
sanctions against Iran but to be realistic, with Iran producing around 4mbpd it is unlikely that sanctions would ever be allowed to go this far to jeopardise oil output, even from Iran. Questions covered the usual topics of compliance, quotas and price, spare capacity levels, and the impact of higher output from Iraq on Iraq’s quota level but there was nothing that could be added other than to re-iterate that the market was working well and that nothing new or untoward was expected between now the next meeting which will be held in October, again in Vienna. However, seven months is a long time to wait for an OPEC event although the International Energy Forum to be held later this month in Mexico will no doubt cover the longer term concerns over supply and demand between producers and consumers. As Mr. El-Badri said about Iraq, the plans have not yet been produced and therefore the impact of higher output could not be dealt with, yet.
Such meetings have to take place even though there is nothing new or contentious to discuss and hopefully we have for now moved away from a series of unscheduled crisis meetings that have been so prevalent in recent years. Today, taking all factors in to account, our forecast for 2010 and through 2011 does not at this point exceed $75 per barrel for Brent Crude and although there are some higher estimates in the market, overall the general feeling is one of stability. Furthermore, the current forward price confirms that the market is not yet trading above $95 per barrel between now and 2018. This is not a forecast as such but it certainly gives a true indication of where the market currently perceives prices to be in the future.
As always, we shall continue to follow the market closely and advise of any further changes.
John Hall is a London-based analyst who runs his own oil consultancy, John Hall Associates . Further information please contact: John Hall +44 (0)7785 274530 or Damien Cox +44 (0)1403 269430 . Petroleumworld does not necessarily share these views.
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