By Paula Dittrick
Senior Staff Writer
HOUSTON, Nov. 20 -- It's only a matter of time before the Organization of Petroleum Exporting Countries will be forced "to revisit the dilemma of high price vs. market share," said Luis E. Giusti, senior advisor to Washington-based Center for Strategic & International Studies.
"It is clear by now that the price band of OPEC ($22-28/bbl OPEC basket) is not only too wide but also too high," Giusti said Wednesday during the opening session of a Houston conference sponsored by Leloitte & Touche LLP, the US arm of Deloitte Touche Tohmatsu.
"As a result, the average yearly increase in demand of some 1-1.4 million b/d is being taken entirely by non-OPEC production, especially Russia. This also has translated into pressure for quota increases from Nigeria, Algeria, and Venezuela," said Giusti, former chairman and CEO of Petroleos de Venezuela SA.
OPEC, without abandoning its role as swing producer, will have to settle for a lower level of prices, Giusti said. While talking with reporters after his speech, he suggested a price of $20/bbl for the OPEC basket or about $23/bbl for West Texas Intermediate crude.
Market situations
"When supply is tight, inventories usually decline, prices rise, and more supply hits the market. However, there are times when the market price structure is backwardated to the point that it prevents inventories from building, and the low stocks create even more backwardation, such as the cycle feeds on itself."
Backwardation is a market in which futures prices are progressively lower in the distant delivery months than in the front month. It's the opposite of contago.
"This situation has historically been coined a 'backwardation vortex' by Energy Security Analysis Inc. [of Boston], and has typified the market dynamics over the past 20 months. The vortex breaker would be the development of prompt crude overhang or a big decline in demand, or both," Giusti said.
It's generally perceived that the backwardation vortex is easing because additional supply is reaching the market, and that the backwardation vortex will disappear when seasonal demand declines in the second quarter of 2004, Giusti said.
"Although the vortex has allowed OPEC to play a 'smoke and mirrors' game, and enjoy the double benefit of price and volume, it is only a matter of time for the cartel to be forced to revisit the dilemma of high price vs. market share," he said.
Earlier this year, Paris-based International Energy Agency discussed the effect that backwardation was having upon markets and crude oil inventories (OGJ, Sept. 22, 2003, p. 5).
Contact Paula Dittrick at [email protected].
