Wednesday, May 20, 2009
What does OPEC fear?
Wednesday, 20 May 2009
OPEC members will meet again May the 28th to discuss about the future of oil prices and their forthcoming actions. The majority of cartel members seem to be satisfied with the current level of oil prices, as the level of $55-$60 per barrel during a severe crisis is acceptable, and, at the same time further rise of the price of oil could hammer the efforts for the revival of world economy . The possibilities of a new production cut are minimal, and the most likely development is a more tight compliance with current quotas. Ali al Naimi, Saudi Arabia’s oil minister and without a doubt the most powerful among OPEC officials, has already said that that the current price is just unfair under the current circumstances.
But, what are the reasons that could make OPEC members fear another slump in oil prices and reaching again the levels of $32.40 like last December?
The first and main threat is low demand. The International Energy Agency (IEA) has predicted fuel consumption this year would be 2.56 million barrels per day less than last year. OPEC and the U.S. government's Energy Information Administration have also lowered their demand forecasts. Potentially providing some support, the U.S. summer driving season is about to begin, although gasoline demand has so far been below last year's levels. The arbitrage shipments that traditionally head from Europe to the United States around this time of year have been slow to get under way.
The second reason is the increase of world and especially U.S inventories, something that is in connection with falling demand. Weak demand has generated huge stockpiles of refined products and unrefined crude not just on land, but also at sea.Crude inventory levels in the United States have reached their highest levels for 19 years. In addition, well over 100 barrels of crude and refined products are estimated to be stored in super-tankers. Traders have taken advantage of a weak market structure and cheap freight to buy up oil now and store it on ships. This has had the effect of depressing the front end of the curve and perpetuating a deep contango -- or structure in which prompt crude contracts are cheaper than those for later delivery.
Another threat is speculators. Although the return of speculators to the market is more probable to sent the prices higher, oil producers don’t forget that last December's slide to the lowest oil price for nearly five years coincided with a massive deleveraging by some market players. Still some investors never left, while others have crept back in, but cautiously. Moves into commodity markets have mirrored an upward trend on equities.
Analysts say equities could have recovered too quickly and commodities such as oil, which have experienced an unusually close correlation to the stock markets, could find themselves chasing them back down again.
From an investor viewpoint, commodities' traditional benefits of being an inflation hedge and a means to diversify a portfolio are not valid for now. Inflation is not yet an issue and the current trend is for all asset classes to move upwards together.
Finally, OPEC has to fear itself, as the higher the prices are, the higher is the temptation for its members to begin cheating on current quotas and make the oversupply problem worst.
Makis Theodoratos, Hellenic Shipping News
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