OPEC cuts have buoyed price, but at a cost
New York: OPEC crude oil output cuts have succeeded in stabilising prices, but haven't cut deeply enough into global stockpiles to sanction a production increase at the group's September 11 meeting.
"As I see it at this time, there's enough crude in the market," OPEC's Secretary General Abdalla El-Badri said on August 28.
He appeared to hint that OPEC will officially keep output restraints in place when it meets at its Vienna headquarters in less than two weeks and takes up the issue again at its scheduled December 5 meeting in the UAE.
"We'll review the market and we'll see what we can do in September, but the picture at this time is not clear. It will be clear to me in December what's going to happen in the American economy," he said, referring to unfolding credit crunch that has sparked fears of an economic slowdown.
Traditional price hawks Iran and Venezuela have in recent days called for OPEC to continue output restraints. OPEC's de facto leader, Saudi Arabia, the world's biggest oil exporter, typically has yet to tip its hand ahead of the meeting.
On July 11, Saudi Oil Minister Ali Naimi had said that prices near $72.50 a barrel weren't justified because "there is a good balance between supply and demand." He said then that the level of inventories-"higher than they have been in the past five years"-were "very, very comfortable."
Indeed, an Energy Matters review of the oil market since October 20, 2006–when OPEC agreed to its first production cuts in two years-shows the group revived prices, at a hefty cost in revenue and market share, but hasn't significantly dented global inventories. Data from the International Energy Agency show that inventories held by those nations in October 2006 were sufficient to cover 54 days of demand.
In its latest report, dated August 10, IEA said stocks at the end of June remained at 54 days cover. IEA's next report, measuring end-July stocks, isn't due until September 12, a day after OPEC convenes its ministerial conference.
OPEC's El-Badri is also set to meet Nobuo Tanana, the incoming IEA executive director, on September 5, but it's unclear what's on the agenda.
IEA has repeatedly pressed OPEC to increase oil output, warning that world oil demand is likely to outpace supply and the gap will widen if OPEC decides not to raise crude production on September 11.
Since the OPEC cut agreement, the average front-month crude oil futures price on the New York Mercantile Exchange is down 5.1 per cent, compared with the prior 220 days.
OPEC's basket tracks a broader variety of crude and is more representative of the market than Nymex prices, which can be subject to wide swings around contract expiration and heavy speculative trading.
Output from the 10 OPEC members (excluding Iraq and Angola) in the group's quota system fell by 1.1 million barrels a day, or 4 per cent, from levels in the 220 days prior to the cut agreement.
Output restraints and lower prices cut the value of OPEC-10 production by 5 per cent, or $86 million a day, to $1.62 billion a day.
Based on IEA data, global oil demand averaged 1.2 per cent, or 1 million barrels a day higher since the output agreement, than in the 220 days before the deal. Despite the rising demand, the cuts meant OPEC's share of the global market slid to 31.2 per cent from near 33 per cent before the deal.
The value of OPEC's oil revenues were further hit by a 6.6 per cent decline in the value of the dollar (the currency in which oil is priced globally) against the euro. On average, the dollar was equal to 80.5 euro cents prior to the cut and just 75.2 euro cents since the cut.
All these factors combine to make a powerful argument for OPEC to hold the line on production-officially-while some countries may ease more barrels into the market ahead of a likely December policy review.
Antoine Halff, energy analyst at Fimat USA in New York, said OPEC's apparent success in stabilising prices isn't shared equally.
"I guess one could argue it's been a success for the (OPEC) countries that have been struggling to keep production going even at reduced rates," he said. "Having Saudis and ... others with spare capacity agree to cut their own output has stemmed the bleeding for the likes of Iran, Nigeria and Venezuela."
Dow Jones Newswires
