It didn't take long for the puzzlement of some analysts over the recent "split decision" by the Organization of Petroleum Exporting Countries to turn to predictions of OPEC's demise.
What was first called a "mistake," with echoes of the ill-fated 1997 Jakarta accord that boosted OPEC quotas even as the Asian economic crisis was collapsing demand, is now being cited as a clincher that the OPEC "cartel myth" is being exploded.
Now some OPEC naysayers are convinced that a price collapse is all but imminent, with OPEC impotent in face of supply pressures pushing oil prices below $20/bbl.
As Samuel Clemens said in response to a premature obituary about him, "Reports of my demise have been greatly exaggerated."
Near-term outlook
Some of this rush to judgment focuses on surging oil production by Russia and resurgent production in Iraq.
The interesting thing to note here is that the latter might very well be hamstrung by the former. One of the biggest obstacles to Iraqi oil supplies returning to the market is the insistence by Russia—which holds a veto on the United Nations Security Council—that sanctions against Baghdad cannot be lifted without UN confirmation that weapons of mass destruction have been eliminated. Of course, Russia—along with Saudi Arabia—has been a major beneficiary of the constraints on (and later outage of) Iraqi oil supplies. The less cynical among us might think the UN and the US-led coalition will settle its differences without further delay, to benefit the Iraqi people and further the coalition's efforts to stabilize that beleaguered country.
Overlooked fundamentals
Putting aside the geopolitics for the moment, there are some near-term physical market fundamentals that are getting overlooked in the rush to proclaim the $20/bbl floor porous at best.
It's worth noting that OPEC undertook a similar "have its cake and eat it too" decision last December, and similar bearish predictions then were subsequently overwhelmed by events and by OPEC cohesion.
At least one contrarian view holds that there is greater upside potential than downside risk in the near term.
Merrill Lynch analysts contend that "most all forecasts for the call on OPEC crude during 2003 stand at too low a level, with the consensus supply-demand level having failed to recognize much higher rates of underlying demand."
Indeed. It would seem the consensus has a short-term memory gap when it comes to the state of inventories today, the latest minor rebound in stock levels notwithstanding.
Also to be considered are the need for oil to be delivered into the US Strategic Petroleum Reserve and the pull on demand from fuel-switching caused by high natural gas prices and the nuclear outages in Japan—offset to some degree by the demand reduction caused by the SARS pandemic. That brings Merrill Lynch to a forecast of 26.3 million b/d for the call on OPEC crude in the second quarter. But a "significant uptick" in demand could be in the offing in the second half, allowing for normal seasonal stock changes. Consequently, the Merrill Lynch analysts forecast the call on OPEC crude at 28 million b/d, "which is whyUthe return of Iraqi oil (is) actually necessary after June to avoid a further overtightening of the oil balance."
There are also significant upward price pressures looming this year for reformulated gasoline, distillates, and natural gas—all related to deficient stock levels—that will have echoes in the price of crude.
And this contrarian view does not even take into consideration the potential for new supply disruptions in key exporting countries. At presstime, there were fresh reports of civil disorder and violence in Nigeria and Venezuela.
As for OPEC's supposed disarray? There are uncertainties regarding Iraqi and Russian (and other non-OPEC) oil supply and their impact on oil markets in the years to come. But take a look at any graph tracking the price of OPEC's crude basket the past 3 years. How often—and for how long—has it been below the bottom of the group's target band? Why assume these other countries will try to instigate a market share grab when the Saudis will always have the whip hand?
(Online May 2, 2003; author's e-mail: [email protected])
