As expected, ministers of the Organization of Petroleum Exporting Countries made no production changes at their Feb. 1 meeting in Vienna, despite pressure from the US and other large consuming countries to increase output.
OPEC ministers repeated their frequent assertion that current production is sufficient to satisfy demand through the first quarter of 2008 and promised to monitor markets until their next meeting Mar. 5. The assumption they would take no action was already priced into the market prior to the meeting. OPEC's inaction could offset recent reports of US crude inventories steadily building above consensus expectations, and crude may continue to hover in the $90/bbl range, said analysts in the Houston office of Raymond James & Associates Inc. However, they said, "We expect incremental Middle Eastern cargoes to hit the market over the remainder of the first quarter, potentially causing further crude weakness in the short term."
Olivier Jakob of Petromatrix GMBH, Zug, Switzerland noted Nigeria's export program for March will be constrained by maintenance, but Iraq has resumed oil exports via its Kirkuk pipeline. "Saudi Arabia has confirmed to be leaking above quota, and [very large crude carrier] activity and freight rates have started this week to rebound in the Arabian Gulf," he said Feb. 1.
In a 2008 commodities report by Barclays Capital, the investment banking division of Barclays Bank PLC, analysts said, "We expect OPEC policy to remain cautious, and we expect non-OPEC supply to again disappoint relative to consensus expectations. We expect prices to move up significantly in the second half of the year, with economic pessimism providing more of a brake earlier in the year."
Middle East demand
While the lion's share of OPEC's production is from its Middle East members, economic development in that area and Asia also has escalated world demand for crude. "In 2007, the three countries with the greatest absolute increase in oil demand were, in order, China, Saudi Arabia, and India. We expect the same three countries to be the main sources of demand growth in 2008. Indeed, China, India and the Middle East as a whole were responsible for virtually all net global oil demand growth in 2007, and we would expect that pattern to also continue into 2008," said Barclays Capital analysts.
They see global demand growth accelerating to 1.7% in 2008 from 1.2% in 2007. "A visible weakening of oil demand growth relative to the pattern of the past 3 years does seem to require an economic discontinuity larger than anything that is currently envisaged," analysts said.
Middle East demand is growing because of high oil prices funneling cash into that area where government subsidies reduce domestic costs of petroleum products. Demand growth in that region could fall if there were a large drop in international oil prices. "However, in that case, one would expect increased demand from elsewhere to compensate for the decline in growth in the Middle East," Barclays Capital said. "In other words, almost half of global growth in 2007 came from a region where the direct short-term linkages to the Organization for Economic Cooperation & Development members' economic performance can be expected to be rather weak."
Barclays Capital analysts said, "OECD demand is expected to remain weak for the fourth straight year, but it has lost virtually all of its ability to occupy the margin of the market and to be a significant price driver."
A fundamental rut
The world oil market has "settled into a fairly comfortable and well-worn groove over the past 3 years in terms of its fundamental balances," said Barclays Capital analysts. "Indeed, the key dynamics on both the supply and the demand side of the market have scarcely changed at all across 2005-2007. It has been that constancy and the associated failure to generate any additional headroom within the short-term market or any additional level of comfort about longer-term balances that has helped prices to continue their drift upwards at all points along the curve."
Therefore, they said, "The rise in prices has been less about anything happening in a dynamic fashion to push prices up and has been more to do with things not happening. The failure of rising prices to loosen global balances in any significant way has been a key component of reducing resistance to the gradual and concerted move up. The key question for 2008 is, then, whether any of the key trends that have continued so stubbornly over the past 3 years are likely to show signs of losing purchases."
(Online Feb. 4, 2008; author's e-mail: email@example.com)