Will another episode of "The Missing Barrels" trip up the Organization of Petroleum Exporting Countries' efforts to sustain a $25/bbl OPEC basket price?
Hints are coming from OPEC ministers that the group is likely to stand pat on quotas at the Feb. 10 ministerial meeting in Algiers. That decision may expose the group to price risk later—and, again, confusion over supply and demand data appears to be the culprit.
Tight or comfortable?
There is much uncertainty today over the actual status of oil markets, notes London-based Centre for Global Energy Studies. The current level of oil prices, in tandem with observable commercial stocks, suggests the market is very tight, CGES said. However, OPEC insists that the market is well-supplied—and in fact has expressed concerns that a supply glut could emerge in the second quarter, forcing a decision to cut output quotas (Market Hotline, OGJ Online, Jan. 19, 2003).
What underlies these differing views are data from OPEC and the International Energy Agency that show global stockbuilds of 800,000 b/d and 900,000 b/d, respectively, in 2003. Yet US crude oil stocks plummeted to a 30 year low this month, and US futures and spot prices have handily topped $35/bbl.
So how do we sort out the conflicting market signals? CGES contends that, if the current supply-demand balances are being represented accurately, "then the only credible explanation is that oil is being amassed in places where it is not being recorded, since neither published stock data nor oil prices support the idea of a large global stockbuild in 2003....Explanations that rely on 'missing oil' have been tried before without success, though."
The London think tank deems it more reasonable that either supply is being overestimated or demand is being underestimated. And the latter is more likely because of the strengthening global economic recovery and the fact that the recent revisions to demand forecasts have been upwards.
$25/bbl target
In case anyone missed the signals about defending a $25/bbl marker price that OPEC has been sending—through actions, if not words—in the past year, here is Saudi Oil Minister Ali al-Naimi making it explicit: "We would like to see the price stay straight within the band at $25/bbl. We would be very happy. That would be a miracle, if we could do it, but I don't think we will ever be able to do it."
Bear in mind that $25/bbl OPEC marker translates to about $28-29/bbl for West Texas Intermediate, which was averaging close to $35/bbl in mid-January.
OPEC's new Sec. Gen. Purnomo Yusgiantoro claimed, in an interview with the Financial Times Jan. 21, that the group is producing full out and could do nothing more to stabilize markets, while acknowledging that oil prices were too high.
Meantime, other OPEC ministers are trotting out the usual suspects in the clamor over high oil prices: "speculators" and "geopolitics."
Any of this sound familiar? It should. This litany is getting to be routine for oil markets: Oil prices spike; reconciling supply-demand data can't explain the spike; OPEC gets defensive, blames speculators and/or political tensions, and claims instead that a glut is around the corner; OPEC then toys with the notion of a preemptive cut to derail that glut; the Saudis push for a "soft landing instead," and, of course, being the Saudis, get it.
The only difference this time is that the soft landing is set for $25/bbl—not the $18-22/bbl of a few years ago, or even the officially proscribed $22/bbl floor. So are the Saudis guessing right this time by steering OPEC to a "hold 'em" stance?
Again, we're back to the accuracy of supply-demand data, according to CGES: "If the current level of oil prices reflects higher demand growth and lower stocks, OPEC will find itself in the happy position of being able to defend $25/bbl without reducing productionUIf the supply-demand balances are right, and the world is well-supplied with oil, then OPEC will certainly have to cut output by 2 million b/d over the coming summer to defend this price target."
Here's a prediction for another scenario: Oil supply-demand uncertainty will persist; OPEC and oil traders will start to get nervous about a supply glut; a major outage or supply threat will materialize, adding a risk premium to prices that offsets the softening induced by nervousness; in retrospect, demand will prove stronger than expected, but OPEC cheating takes care of that.
Sometimes hindsight is foresight.
(Online Jan. 26, 2004; author's e-mail: [email protected])