Even with the threat of war looming between the US and Iraq, rising oil demand, and dwindling crude inventories, the Organization of Petroleum Exporting Countries pretty much just shrugged at its Sept. 19 meeting in Osaka.
While there had been some impetus for boosting quotas to "legitimize" the group's current overproduction—pegged at 1.9-2.0 million b/d—that withered in the face of too many market uncertainties in the months to come.
While boosting quotas might not have done much to increase physical supplies, OPEC had to be mindful of the last time it sought to legitimize overproduction during a period of flagging economic indicators: the price bust of 1998. A quota boost would have sent a bearish signal to oil markets, possibly costing OPEC members a few dollars per barrel in oil prices in the weeks ahead.
Saudi Arabia in particular was on the horns of a dilemma: Anxious not to let oil prices top $30/bbl, for fear of offending key consuming countries and further crippling demand; yet equally concerned about not being seen as kowtowing to the US amid high tensions in the Middle East, and thus sacrificing political as well as economic capital.
Yet the Saudis are likely to flout their quota still further if the US-Iraq saber rattling gets louder and oil prices top $30/bbl for a sustained period. This will put added barrels on the market at a time when they might well be needed and help keep oil prices from advancing towards $40/bbl—albeit briefly—when hostilities break out. It also will help entrench a bit more Saudi market share in the aftermath of hostilities—when a defeated Iraq ramps up production and exports again.
That prospect may explain OPEC's reluctance to take steps to boost supplies just as much as does the uncertain look for demand.
Demand outlook
Certainly, OPEC has to assume that oil demand will continue to remain relatively weak in the fourth quarter and possibly through first quarter 2003. Members still feel the sting of that ill-fated December 1997 decision to boost quotas on the presumption that Asian demand would be there to sop up the extra volumes—and instead collapsed.
Now we have the International Energy Agency voicing alarm over the state of stocks today while projecting a relatively respectable hike in demand for the rest of the year. In support of that view are the latest data from the American Petroleum Institute. Crude inventories in US Petroleum Allocation for Defense District 2 for the week of Sept. 16 reached their lowest level since 1991.
So despite OPEC claims that demand remains soft and that the current high price of oil is built upon the flimsy foundation of a war premium that is likely to quickly disappear, the underlying market fundamentals may suggest a tighter market ahead nevertheless.
Boston-based Energy Security Analysis Inc. points to the state of onshore inventories as the oil market's "primary real-time indicator" and notes that OPEC's Jan. 1 production cuts did not begin to affect onshore inventories until the summer.
"Typically, it takes 6 months for increases and decreases in production to have a measurable impact on consuming countries' inventories," said ESAI Managing Director Sarah Emerson. "Even if the trend in lean stocks is centered more in the US than elsewhere, it is still very significant for crude oil pricing because of the inordinate influence of (West Texas Intermediate), through the (New York Mercantile Exchange), as a global benchmark."
Iraqi wild card
As always—but perhaps not much longer—there is the Iraqi wild card.
One of the strongest signals of a moderating oil price outlook was Saudi Arabia's recent expression of willingness to allow the US to use its bases as a staging area for an attack on Iraq.
If the Saudis were that concerned about a wider conflict erupting from such an attack or about local outrage spawning a domestic insurrection, would they have taken that step?
Even while the war debate rages on in the US, there seems little doubt in the Middle East about the firmness of US resolve to oust Saddam Hussein—or about the speed with which that outcome will occur.
Saddam sees that, too—hence the ploy to readmit United Nations weapons inspectors. If he is allowed to string out his usual cat-and-mouse game on inspections and succeeds in holding off a US-led invasion, then count on the "war premium" in oil prices being perpetuated.
(Online Sept. 20, 2002; author's e-mail: [email protected])
