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OPEC can still influence oil prices Cartel unable to bring down current prices, but could be in a strong position next year; OPEC president refers to $50 oil as ‘normal’ Brad Foss Associated Press Business Writer
OPEC’s inability to bring down the cost of oil has helped push U.S. gasoline prices above $2 a gallon for the past three months. But don’t jump to any hasty conclusions about the cartel’s influence or intentions in the market.
The Organization of Petroleum Exporting Countries could be in a stronger position next year if analysts’ forecasts of a growing supply cushion prove to be correct. And while that would ease traders’ jitters and likely make oil and gasoline cheaper, it might also put OPEC in the mood to cut production to prevent prices from falling too far.
OPEC officials, who said the week of June 20 that they are considering boosting their output target by 500,000 barrels a day, insist they aren’t to blame for the latest surge in oil prices to the record $60 per barrel level. They say their aim is to ease prices as a way of keeping the global economy from seizing up.
But traders dismissed the latest effort — as well the OPEC agreement on June 15 to raise its output target by half a million barrels on July 1 — because no new barrels would immediately hit the market and because it would further deplete OPEC’s already thin supply cushion. Record close on Nymex On June 24, after climbing as high as $60 a barrel for the second straight day, light, sweet crude for August settled at $59.84, an increase of 42 cents on the New York Mercantile Exchange. It was a record close on Nymex, where oil futures have been traded since 1983.
On London’s International Petroleum Exchange, Brent crude futures for August delivery rose 40 cents to settle at $58.40 a barrel.
“It’s clear that OPEC has lost control of prices in the near term,” said Yasser Elguindi, senior managing director at Medley Global Advisors in New York.
OPEC officials pin the blame for soaring prices on the world’s limited refining capacity and speculative trading on futures markets. But that’s not to say they’re unhappy — despite public pronouncements to the contrary — about the huge profits the cartel is reaping.
Analysts said there are a wide range of factors contributing to the 60 percent surge in oil prices in the last year that are beyond OPEC’s control. Economists didn’t see demand surge coming For starters, economists worldwide failed to predict last year’s 3 percent surge in global oil demand, with half of that growth coming from China. As a result, everyone from Saudi Arabia to Exxon Mobil Corp. was caught off guard. This was compounded, analysts said, by years of underinvestment in new production and refining capacity.
Even now, flush with cash as a result of high prices, major oil companies are using large sums to buy back shares and raise dividends. This is partly out of fear that the higher prices won’t last, but also reflects the opportunity constraints the industry faces as oil-rich nations such as Venezuela and Russia make it ever more expensive for foreign companies to gain access to their natural resources. Supply disruptions following the war in Iraq, Hurricane Ivan and labor strife in Venezuela have also taken a toll on market stability. So has the tapering off of Russian production.
“It’s a bit naive to think that it’s up to OPEC to open the taps and flood the market,” said Antoine Halff, director of global energy at Eurasia Group in New York.
And yet, with crude inventories steadily rising around the globe, the roughly 30 million barrels per day that OPEC has been pumping cannot be ignored. “Stocks have been rebuilt by quite a bit,” said Halff. U.S. crude supplies up In the United States, crude supplies stand at 327.4 million barrels, or 8 percent above year ago levels, according to the Energy Department, which said this week that “inventories remain well above the upper end of the average range for this time of year.”
Whether the economic and political uncertainty around the globe justifies the level of fear gripping energy markets or not, analysts said the underlying factor — the extremely thin supply cushion — could begin to dissipate in 2006. New oil development projects in Saudi Arabia and in some non-OPEC countries will soon come on line, and demand growth is slowing in China and the United States, they said.
PFC Energy, a Washington-based consultancy, estimates that OPEC’s spare production capacity, which is currently about 1.5 million barrels per day, is on pace to rise as high as 2.7 million barrels per day a year from now. Moreover, most of the extra barrels coming from Saudi Arabia, Kuwait and Nigeria will be the light-sweet crudes that refiners prefer for the production of transportation fuels. While not as large as the 3 million to 5 million barrel per day supply cushion that the markets were accustomed to in the 1990s, this could be enough excess production capacity to ease traders’ jitters and allow prices to begin falling. OPEC may defend prices It is at that point, PFC and others warn, that OPEC may step into its lost-but-not-forgotten role of reining in output to defend prices.
“What we don’t know is what level they want prices to stay at,” Elguindi said, though he emphasized that the days of $25 a barrel as a suitable level are long gone.
Energy consultant Dan Lippe of Houston-based Petral Worldwide said “we could be back in the mid-$30 range by the beginning of next year unless the Saudis step in.” But PFC Energy contends the Saudis would step in much sooner, if needed, to keep prices above $45 a barrel “to satisfy the OPEC price hawks and to preserve income.”
In a June 26 Reuters report out of Kuwait City, the president of OPEC referred to a Brent crude price of $50-51 per barrel as “normal,” resulting in some consensus among observers that OPEC’s latest target price is $50 per barrel.
Even if predictions of a larger supply cushion in 2006 come true, analysts cautioned that the market is likely to remain tight and that prices will be volatile, assuming strong demand and continued geopolitical uncertainty. In other words, OPEC’s influence on prices will ebb and flow, as always, depending on a variety of external factors.
“The thing is, we shouldn’t just sit back and expect OPEC to do everything,” said oil analyst Timothy Evans at IFR Energy Services in New York.
“Consumers can make more intelligent choices, particularly about the mileage of the vehicles they drive,” he said. “Factors like these are clearly outside of OPEC’s sphere of responsibility.”
Editor’s note: In a number of press reports, including a June 26 Reuters story out of Kuwait City, the president of OPEC referred to a Brent crude price of $50-51 as “normal,” resulting in some consensus among observers that OPEC’s latest target price is $50 per barrel.
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