The world is awash with oil and the OPEC is meeting tomorrow to chalk out its course — exceptionally trying environment indeed. With little space available for storing oil now, markets continue to be battered. In the United States, vast storage oil farms are almost out of room and some oil-producing countries have pumped millions of barrels into idle tankers that are now serving as little more than floating storage tanks. And consequent to all this, the OPEC and the IEA (International Energy Agency) are on an open collision course — for the first time in some years. Ominous signs all around!
OPEC has limited options in the given circumstances. And despite serious attempts at stemming the slide, they seem fighting a losing battle, some argue.
In the build up to the OPEC meeting, sentiments seem to have undergone a sea change — a complete metamorphosis. Although nothing could be said with certainty, and OPEC is apt at springing surprises, the emerging view is — no further cuts in output. Prevailing circumstances are so exceptional that Riyadh, which otherwise avoids taking public positions until the end, was forced to hint in advance its opposition to further cuts.
Analysts are looking at the hint from various angles. Some say that the strength of the dollar in recent months has provided an additional cushion to the producers. And thus despite insisting on a “fair price of around $75,” Riyadh for the time being, and in view of the global economic breakdown, could be contented with even a lower price.
“The Saudis would prefer prices in the $60-70 range, but can live with $50 a barrel, given a world which is in meltdown,” said Leo Drollas of the London based Center for Global Energy Studies. “They don’t want to push the price up against all the odds. OPEC won’t do much on March 15,” he was quoted as projecting.
There could be other issues too. If Saudi Arabia reduces output to significantly lower than the current about 8 million bpd, it could be faced with the issue of feedstock availability for its utilities and the petrochemical industry. These industries depend a lot on associated gas as feedstock. In case Saudi Arabia reduces crude production further, it may be faced with dwindling supplies of associated gas, some argue.
Even Tehran, known as a hawk within the OPEC, also seems to be following the lead now. Iran’s oil minister Gholamhossein Nozari was quoted as saying last week “I do not think that we would move toward cutting production again.”
This is a major change in heart for Iran. And this is despite the fact, in order to balance its budget; Iran needs a considerably higher price for crude oil than Saudi Arabia.
There are a couple of other interpretations too for the changing stance. With oil demand seemingly getting worse by the day, the US GDP revised lower again and the Dow Jones hitting below 1997 levels of 7,000, some analysts argue that OPEC might be calculating that an output cut will be buried by another avalanche of grim macroeconomic news. And in such circumstances, OPEC did not want to be seen firing off one of its last cartridges to no avail.
And then like Saudi Arabia, other member states too, have practical issues to ponder. Announcing — but not following through — on new production cuts could erode OPEC’s credibility further and essentially take the sting out one of the organization’s main weapons.
And with crude overflowing, the traditional rivalry between OPEC and the IEA — representing two ends of the global energy equation, seem to have been rekindled. Last week, the OPEC snapped back at the IEA over its assessment that oil prices of around $40 a barrel would be good for the global economy.
“The IEA has said that the world would get a trillion-dollar economic stimulus if oil prices stay at around $40 a barrel through 2009,” the head of the Organization of Petroleum Exporting Countries, Abdalla Salem El-Badri, said in a statement.
“The moderation of prices since last summer’s extreme certainly offers some short-term relief to consumers. However, if the current low price environment persists, this short-term relief may not translate into long-term gain,” El-Badri argued.
Even the IEA, which represents industrialized oil-consuming countries, had recognized that a lack of investment now by OPEC “threatens a supply crunch around 2013, and a price surge,” El-Badri said.
IEA’s position was therefore “confusing and misleading: Whilst asking for prices to remain at $40, it also wants investments to be made that are not economically viable at these prices. It is a short-sighted view,” the OPEC chief said.
If this war of words heats up, it could easily be a recipe for disaster, let’s be aware. It would emit signal that while the demand-supply balance was tight, every one was talking of dialogue, to cajole OPEC into action. And as soon as the situation tilts otherwise and the initiative is back with the consumers, the urge for dialogue and fair price has dissipated.
This is an ominous development, emitting wrong signals — with long term consequences, people in organizations such as the IEFS need to take note of.
