Several signs point to the likelihood that oil prices have topped out this year and face growing downward pressure in 2004.
And barring any wild cards—such as Venezuela or Nigeria—the herculean task of balancing oil markets next year falls largely to Saudi Arabia.
It's way too early to talk of an oil price collapse next year; in fact, the betting should go against that possibility, given the enviable track record on price defense (led by the Saudis) that the Organization of Petroleum Exporting Countries has demonstrated since 1999. The latest such success was the defense of a $25/bbl price target for the OPEC basket of crudes embodied in OPEC's recent surprise decision to cut production by 900,000 b/d effective Nov. 1.
Coupled with the by-now-routine incorporation of a price premium for conflict in the Middle East, the supply cut has kept oil prices bolstered near $32-33/bbl (New York Mercantile Exchange next-month futures).
'Enjoy it while you can'
For OPEC, and the Saudis in particular, the resulting windfall may be a case of "Enjoy it while you can."
Indeed, the windfall from higher prices and increased production this year has been substantial for the OPEC members excluding Iraq. London-based Centre for Global Energy Studies estimates that the combination has raised OPEC revenues by $60 billion over the past 12 months
The Saudis alone have netted an extra $19 billion in oil export revenues in the past year. In fact, the kingdom now is looking at an $8-10 billion budget surplus vs. the $10 billion budget deficit it had earlier projected, based on an oil price of $18/bbl, noted CGES.
"However, this windfall is likely to be absorbed by increased spending to satisfy domestic political needs and not by debt repayment, making Saudi Arabia even more dependent on high oil prices in the future," CGES said.
Saudi juggling act?
Can the Saudis continue to sustain this juggling act? As always, befitting the country with the bulk of the world's spare oil productive capacity, the brunt of any supply cuts will have to be borne by Saudi Arabia. And that will work as long as the Saudis can still produce at more than 8 million b/d while oil prices remain at $25/bbl or more. But that isn't likely to be the case in a few months or so as market share dwindles.
Oil demand will slip, year to year, in response to higher prices, while non-OPEC supply will rise. International Energy Agency predicts the call on OPEC oil—minus Iraq—will fall to 23 million b/d at the end of the heating season while Iraqi output steadily ramps back up.
While oil stocks in the Organization for Economic Cooperation and Development nations remain as much as 75-76 million bbl below normal, the trend is for stockbuilding to start catching up. Merrill Lynch's Michael Rothman estimated OECD stocks at the end of September jumped by 12 million bbl vs. the usual build of 2 million bbl.
Geopolitical shifts
And there may be market-stabilizing factors amid recent geopolitical shifts, particularly with regard to the Middle East. A.G. Edwards analyst Bill O'Grady claims the US isn't letting the nascent guerrilla war in Iraq deflect it from what he sees as the country's ultimate goal in Iraq: control of the Middle East.
According to O'Grady, recent US overtures toward Turkey with regard to a presence in Iraq and responses to Israeli attacks on Syria, plus its stiffening resolve toward Iran and improving cooperation from the Saudis in the war on terror, all point to increasing pressure on the region's governments to toe the US line or face the consequences. In short, the situation in Iraq may stabilize sooner than many believe today, with concomitant supply pressures on prices.
If everything else stays equal with regard to the weather, economy, and supply outages in the coming 6 months, then the price defense boils down to the Saudis' ability to court non-OPEC—namely Russia—in the next few months to join in a defense of price. Recall the last major Riyadh-Moscow standoff on oil supply cuts: Russia blinked and cut supply. But that acquiescence was a bit of a sham, considering weather-related logistical problems always cut Russian supply in winter anyway.
Don't be surprised to see a repeat of this faux brinksmanship.
(Online Oct. 20, 2003: author's e-mail: [email protected])
