it’s All About The Oil (Income)
Faced with an expected seasonal drop in demand but continued strong oil prices, the Opec cartel is in a quandary over whether to change the amount of oil it supplies the market. Energy ministers from the 11-member Organisation of Petroleum Exporting Countries, which produces nearly 40 per cent of the world’s oil, have sent mixed messages about whether they will maintain their output quota of 24.5m barrels of oil a day, or reduce it to head off a slide in prices as the winter ends and demand falls in the northern hemisphere. They will meet on Tuesday in Algiers to discuss the issue.
Many Opec members are producing more than the 24.5m barrels as US benchmark oil prices remain above $30. The preferred $22-28 band for the price of Opec oil has long been surpassed, even though Ali Naimi, Saudi Arabia’s energy minister, recently insisted the range was still valid. "In Opec in general and Saudi Arabia in particular we would like to see prices between $22 and $28, as near as possible to $25, and to stay there. That is a goal," he said at the World Economic Forum in Davos last month. Low inventories in the US and other major consuming countries and a colder than expected winter in the US and Europe, as well as Iraq’s delay in fully re-entering the market have helped to keep prices high.
But the International Energy Agency, the consumer watchdog group, expects demand to plunge in the second quarter. Petroleum Intelligence Weekly expects demand for Opec oil to be 4.3m b/d below its estimates of Opec output, highlighting the reason ministers are considering a cut, despite current high prices.
Cartels are unnatural beasts. There is always incentive for someone to go outside the agreement in order to make an extra buck or two.
John Waterlow, analyst at Wood Mackenzie, said: "This is a pretty critical time of the year. Everyone expected and they expected to have to cut come this spring because that is what they would normally have to do." But a cut could push up oil prices, which would anger Opec’s customers and may risk slowing US and Chinese growth. Jim Placke, a senior associate with Cambridge Energy Research Associates, pointed out that with questions about the future growth of Russian oil exports threatened by Moscow’s intervention in the sector, the global oil industry was "a little bit stretched right now". Though Opec’s surprise cut last year has made observers wary of making predictions about forthcoming meetings, Mr Placke said: "The easiest thing to do is always to do nothing." |