OPEC enjoying bull market while it can

The Organization of Petroleum Exporting Countries is getting what it can while it can.

The official target price band of $22-28/bbl for a basket of OPEC crudes has flown out the window. The presumed rationale is that a slumping petrodollar doesn't have the purchasing power it used to.

The OPEC ministers who met in early December knew full well that the prospect of oil market oversupply loomed in 2004 absent any unexpected outages or startling growth in demand. Rising non-OPEC output and continuing OPEC overproduction would combine to yield a market brimming over with stocks, in contrast with the tight inventory situation of the past year.

At the same time, while there remains much uncertainty over how much the capture of deposed dictator Saddam Hussein will contribute to Iraqi oil security, it is difficult to see how it could be anything but ultimately bearish for oil markets. Iraq's rebounding output already had been giving the OPEC 10 pause for concern before his dramatic capture.

And the recent bid by Libya to rejoin the ranks of civilized nations certainly fuels the bears' fire, especially with its African OPEC colleagues Algeria and Nigeria clamoring for higher quotas as well. That bid echoes progress for the Bush administration in other areas—Iran on nuclear transparency, a possible breakthrough in the Israel-Palestine standoff—that could mean a less volatile Middle East and therefore lower oil prices.

What sense, then, would it make to send bearish signals to the market by officially seeking higher production quotas—especially when the group is already exceeding existing quotas? Petrologistics recently pegged OPEC 10 overproduction at 1.3 million b/d in December.

OPEC now supports, if unofficially, an OPEC basket price floor of $25/bbl. And the group certainly doesn't seem too worried about its basket remaining above $28/bbl for a period sufficient to trigger quota cuts per the price band's original design.

Rising stocks

If anything, OPEC is looking ahead to early next year, when it might have something else to worry about: its official price band floor of $22/bbl getting penetrated.

"Without a disruption to supplies or an unexpected boost to demand in early 2004, stocks are expected to rise sufficiently to put oil prices under downward pressure during first quarter 2004, requiring a big reduction in OPEC's output to keep price above the $25/bbl floor," said London think tank Centre for Global Energy Studies in its December monthly oil report.

While stocks remain tight at the moment, CGES notes, forward stock cover is improving.

"With current levels of OPEC production, stocks look set to continue to rise over the winter, unless we have a repeat of the icy temperatures suffered at the start of 2003," the consulting group said. "Prices are likely to begin to weaken in response to this stockbuild when US refineries begin to go into turnaround in late January or early February.

"Once the price slide begins, it is likely to be steep, requiring prompt action from OPEC to prevent prices from falling to the bottom of [its] official target range over the middle two quarters of 2004."

OPEC solidarity threatened

Trouble is, that prompt action could be more difficult than it has been in years. OPEC's excellent track record of solidarity the past 3 years may be threatened as ministers in 2004 mull requests for higher quotas from some members and possibly an overhaul of the basic quota system itself.

And pundits suggest the cloud gathering over Russia's oil sector in the wake of the OAO Yukos affair—which abruptly reversed a strong bear signal—may dissipate with the April elections in that country. Production is building off West Africa, Brazil, and in the Caspian region. Rising output of nonconventional crude in Canada and Venezuela (not covered by Caracas's OPEC quota) is slowly becoming more of a market factor.

CGES observes that 2004 could be an echo of 2003, in which special factors on both the supply and demand sides combined with OPEC solidarity to give the group a good year.

More civil unrest is likely in Venezuela and Nigeria in 2004, but unlikely to the extent seen in 2003. As Iraqis rush to bolster their own security with the evaporation of Saddam's spectre, their country will be less of a supply concern. And don't count on another demand surprise next year.

So here's a candidate for OPEC's unofficial motto of the moment: Make hay while the sun shines.

(Author's e-mail: bobw@ogjonline.com)


OGJ HOTLINE MARKET PULSE

Latest Prices as of Dec. 29, 2003

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NOTE: Because of holidays, lack of data availability, or rescheduling of chart publication, prices shown may not always reflect the immediate preceding 5 days.

*Futures price, next month delivery. #Spot price.

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