by Sam Fletcher,
The health of the US economy is "one of the biggest risks to the oil market," which is likely to remain "biased on the cautious side while awaiting clearer signs" of recovery, said James Zhang at Standard New York Securities Inc., the Standard Bank Group. "The oil market is torn between continuously tightening [supplies] and signs of weakness in the US recovery," Zhang reported. Energy prices waffled in volatile trading during the week ended May 20, with the expiring June contract for benchmark US light, sweet crudes finishing at $99.49/bbl in New York. In London, the July IPE contract for North Sea Brent closing at $112.39/bbl.
That same week, the International Energy Agency reported an "urgent need" for additional crude supplies "on a more competitive basis" to prevent "further tightening" of the market. Officials urged "action from producers"—primarily members of the Organization of Petroleum Exporting Countries with additional production capacity—to reduce the high energy prices threatening global economic recovery.
"We agree with IEA's assessment that the market has tightened significantly since March," Zhang said. It is "most pronounced" in the US where commercial inventories of both crude and oil products declined from a 5-year seasonal high in early March to 40 million bbl below last year's seasonal level and only 11 million bbl above the 5-year average in the week ended Mar. 11. He blamed "excessive crude inventories" at Cushing, Okla., "which are largely trapped due to infrastructure restrictions."
Upcoming OPEC meeting
Production quotas are expected to be "high on the agenda" at OPEC's June 8 meeting in Vienna. Since OPEC's last meeting Dec. 11, 2010, a wave of political unrest has swept the Middle East, ousting longtime rulers in Tunisia and Egypt and triggering armed rebellion in Libya. "We believe production quotas will be increased," Zhang said. "To some extent, the fact Saudi Arabia has increased its oil production faced with the civil war in Libya makes the official quotas less important. Nevertheless, OPEC's stance remains important." But he doubts a quota increase by other OPEC members will offset the loss of production from Libya.
Zhang also noted OPEC members are likely to seek higher oil prices as many member countries have significantly increased public spending recently. The presence of Iran's president at the meeting also increases uncertainties of any possible quota agreement among OPEC's members, he said. Meanwhile, IEA said it is prepared to use "all tools" available to member countries. "Arguably, the only significant tool IEA and its member countries have is their strategic petroleum reserves," Zhang said. "Should the IEA decide to use the SPR to influence prices, it would represent a major shift away from its practice, which remains a highly unlikely move, at least for now."
Zhang observed, "As Saudi Arabia holds most of OPEC's spare capacity, we expect Saudi's crude production to tick up even if official OPEC quotas disappoint the market, which could give some welcome relief to the oil market. Although demand in the developed economy, particularly in the US, has shown some signs of softening, supply remains the bigger constraint, which poses further upside risks to both prices and volatilities."
Meanwhile, Iranian President Mahmoud Ahmadinejad may represent his country at the OPEC meeting, having earlier this month dismissed Oil Minister Massoud Mirkazemi who held the rotating OPEC presidency. The Iranian Guardian Council recently ruled it was unconstitutional for the Iranian president to serve also as oil minister, even temporarily. But apparently the president will retain the interim role.
"Beyond turning the meeting into a media circus, it is difficult to predict what might be the impact of Ahmadinejad's prospective attendance," said analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC. His presence "would be an awkward barrier to the delicate behind-the-scenes discussions that are the backbone of any OPEC decision," they said. OPEC's official production ceiling has remained unchanged since a record 4.2 million b/d cut in December 2008.