Two events occurred Jan. 30 that should have long-term effects on oil markets. On that date, to no one's real surprise, ministers of the Organization of Petroleum Exporting Countries agreed to maintain production at 27 million b/d for the 10 members other than Iraq, which that same day conducted its first nationwide election since the 2003 war.
Officials said 57% of 14 million eligible voters went to the polls in Iraq to elect a new government. They said it could take 10 days for the election results to be known. At stake are 275 seats in Iraq's national assembly. Iraq's next challenge will be to come up with a new constitution that will satisfy hostile political factions.
Meanwhile, OPEC members voted to suspend temporarily the $22-28/bbl target price band for crude that they instituted in 2000, as prices have remained above $28/bbl since December 2003. OPEC ministers also agreed to monitor crude markets prior to their next meeting Mar. 16 in Iran.
"Although OPEC continues to pay lip service to its $22-28/bbl target price band, it has long abandoned any real attempt to keep prices within that range," said the London-based Centre for Global Energy Studies in a Jan. 24 report. "Whatever their public stance, every member of the organization is seeking to maintain the price of the OPEC basket of crudes well above $28/bbl, and none is unhappy to see it at its present level of more than $40/bbl."
Moreover, CGES predicted, "Saudi Arabia's revenue needs in 2005 will lead it to seek an OPEC basket price of at least $35/bbl this year at an average level of oil production of around 9 million b/d."
Higher prices expected
Analysts in the Houston office of Raymond James & Associates Inc. expect an even higher average OPEC price.
"Given the weaker dollar, higher shipping costs, and minimal evidence of price-related demand destruction, it is easy to see why Saudi Arabia and most other OPEC members would insist on $40 WTI as the floor going forward. If anything, the only opposition within OPEC to the Saudi stance is that it is not bullish enough!" they reported Jan. 24.
Still, with OPEC's latest meeting and Iraq's first election now somewhat safely past, some US financial analysts are expecting more participants in world markets.
Raymond James analysts earlier observed that if the Iraqi election establishes "an effective government," one or more major international oil companies might decide to invest in that country (OGJ Online, Jan. 17, 2005).
Paul Horsnell of Barclays Capital Inc., London, reported Jan. 26 that longer-term crude prices hit all-time record highs the previous week. Futures prices for benchmark US light, sweet crudes for December 2010 delivery have moved above $40/bbl for the first time, he said.
"The front end of the WTI curve was at its highest exactly 3 months ago, and since then the curve has flattened noticeably," without derailing the upward trend of longer-term prices, said Horsnell. "For us, that move up in the commodity market's view of sustainable longer-term oil price averages is the single most important market feature that necessitates change within the oil industry and its associated capital markets."
He said, "The back end of the curve has risen by $12 over the past year, by $17 over the past 2 years, and by $19 over the past 3 years. The now-abandoned $18-21[/bbl] consensus for longer-term prices looks like rather a quaint relic, and we would now expect the market to become increasingly comfortable with placing the back end of the curve above $40[/bbl]."
IEA revises OPEC call
The Paris-based International Energy Agency reported in January that Iraqi production increased by 160,000 b/d in December to an average 1.95 million b/d. Iraq's total oil exports gained 210,000 b/d to 1.55 million b/d.
But Iraqi consumption fell by about 55,000 b/d as pipelines feeding the northern Baiji and Daura refineries were repeatedly disrupted. Because of pipeline sabotage, crude had to be trucked to the Daura facility in December. A Dec. 23 attack shut down pipelines feeding Kirkuk crude to the Baiji refinery until the second week of January.
IEA raised its earlier prediction of the expected call on OPEC by 100,000 b/d to 28.1 million b/d in 2004 and by 300,000 b/d to 28 million b/d in 2005.
In December, OPEC ministers voted to reduce overproduction by 1 million b/d effective Jan. 1. Just prior to Jan. 30, crude exports from OPEC were reported down by nearly 800,000 b/d from their peak in late December, and scheduled loadings indicated a further decline of 30,000 b/d through Feb. 12.
(Online Jan. 31, 2005; author's e-mail: firstname.lastname@example.org)