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OPEC takes no action

Sam Fletcher
Senior Writer

As expected, ministers of the Organization of Petroleum Exporting Countries made no move either to reduce or to increase production at their Mar. 15 meeting in Vienna, vowing instead to monitor the world oil market until they next meet in June.

Last October, the 10 OPEC members other than Iraq voted to reduce their total production by 1.2 million b/d to 26.3 million b/d effective Nov. 1 to stop a run-up in crude prices. At their Dec. 14 special meeting in Abuja, Nigeria, the same 10 members agreed to shave an additional 500,000 b/d to 25.8 million b/d effective Feb. 1 "to balance supply and demand." Analysts estimate OPEC actually has cut production by nearly 1 million b/d, while OPEC officials claim 1.2 million b/d. At any rate, crude prices have fallen from record highs in December to $58-62/bbl in recent weeks, although still subject to volatile swings.

At the end of their brief March meeting, OPEC ministers said, "Although all indicators clearly show that the market remains well supplied with crude oil and that the Organization for Economic Cooperation and Development [countries'] commercial oil stocks are healthy, overall oil market volatility is likely to continue." Meanwhile, they said the world economy in 2007 is expected to remain relatively firm, growing slightly slower than in 2006 because of higher interest rates.

OPEC also issued its Monthly Oil Market Report for March in which it said a combination of moderating demand growth and increasing distillate and conversion capacity should lead to an increase in spare refinery capacity this year.

With the end of winter and fewer concerns about the summer driving season, market attention is expected to shift to crude oil developments in the coming months, the report said. "As a result, aside from potential downside risks to the world economic outlook, other factors such as non-OPEC supply, the pace of incremental demand and nonfundamental factors including geopolitics warrant close monitoring as they are expected to be the main drivers behind crude oil price movements in the coming months," the report said.

"Overall, refiners are sitting on comfortable stock levels across the world, and with the completion of US refinery maintenance schedules, gasoline stocks in the US could rebound from the recent draw ahead of the driving season," OPEC said.

The report increased its estimate of world oil demand growth for 2007 by 100,000 b/d to 1.3 million b/d, or 1.5%, primarily because of increased North American demand this winter. Non-OPEC output is expected to average 50.6 million b/d in 2007, an increase of 1.2 million b/d over the previous year and a downward revision of 46,000 b/d from the last assessment. Preliminary data for February put non-OPEC supply at 50.5 million b/d. In February, OPEC crude production averaged 29.96 million b/d, broadly unchanged from the previous month. In 2007, demand for OPEC crude is expected to average 30.4 million b/d, broadly unchanged from the previous year.

Psychological difference
On Mar. 14, the day before the latest meeting, the average price for OPEC's basket of 11 benchmark crudes dropped 11¢ to $57.14/bbl, compared with $57/bbl at the start of the December meeting in Abuja. "While the value of the OPEC basket is little changed since Abuja, psychologically there is of course a huge difference between December's weakening $57/bbl and the current $57/bbl, having recovered from a January low below $48/bbl," said Paul Horsnell at Barclays Capital Inc., London.

Much of the underlying market sentiment, "particularly among speculative funds, is somewhat negative just it was in December," Horsnell said. However, the market's focus "has perhaps shifted from more immediate direct concerns about the possibility of slowing oil demand and rising oil supply to less defined concerns about macroeconomic growth prospects derived from factors as diverse and as distanced from the oil market as the subprime mortgage market and equity market performance," he said. "In other words, sentiment remains fairly negative but is perhaps now centered on features that OPEC has less direct control over."

Prices and speculative sentiment might not have changed much over the past 3 months, but OECD inventories have fallen faster than the usual seasonal pattern, and crude supplies have tightened. "Market balances going forward look tighter than they did previously under all the main forecast models. That tightening has been due to the reduction in OPEC output combined with the general move to more pessimistic views on non-OPEC supply growth and the relative solidity in the views held of demand," said Horsnell.

(Online Mar. 19, 2007; author's e-mail: samf@ogjonline.com)


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