The price of Brent crude oil plunged below the $13/bbl level last week as markets drew little hope from a planned meeting of Organization of Petroleum Exporting Countries ministers, slated for Mar. 16.
The meeting was originally planned as a routine gathering of OPEC's production monitoring subcommittee, comprising three oil ministers plus the OPEC secretary general. But, as prices fell below $14/bbl, Indonesia's energy minister, currently president of the OPEC conference, proposed that all 11 ministers attend (OGJ, Mar. 9, 1998, p. 36).
Brent crude for prompt delivery fell 81¢/bbl in trading on Mar. 9 to close at $12.28/bbl; Brent for April delivery fell 78¢/bbl on the day to close at $12.96/bbl. By close of trading on Mar. 10, prompt Brent had rallied a little to $12.38/bbl while April Brent had reached $13.03/bbl. Brent crude has fallen more than $6/bbl since OPEC set its new quotas (OGJ, Dec. 8, 1997, p. 21).
As Venezuela maintained it would not cut output "by a single barrel," Saudi Petroleum Minister Ali Al-Naimi said, "We do not want to reduce production to find out that other countries, especially those which do not adhere to quotas, are flooding the market and taking our valuable customers."
Saudi Arabia and Iran issued a joint position statement. Middle East Economic Survey (MEES) reported that the two countries said "...they would be prepared to coordinate their efforts with OPEC members to restore stability to the oil market, provided that 'meaningful efforts' were undertaken by quota-violating member countries to reduce their overproduction."
Who's to blame?
Meanwhile, London's Centre for Global Energy Studies (CGES) said that, although market commentators have blamed speculators for exaggerating the recent downward pressure on oil prices, the oil industry has played a role."Although the recent collapse in oil prices," said CGES, "certainly coincided with the biggest net short position held by noncommercial traders in the past 4 years, it was also matched by an equally massive increase in the buying of futures contracts by oil hedgers.
"It is not, therefore, correct to argue that short-selling by speculators depressed prices in the same way that sales of real oil would depress prices, since the same amount of oil was being bought simultaneously by hedgers in order to lock in the cost of future purchases of real oil in the physical market."
The analyst said that the average long or short position held by noncommercial traders as a group is only one tenth the size of that held by commercial traders but more than five times as variable. Also, an analysis showed that the number of noncommercial traders is much more variable than the number of commercial traders, suggesting that speculators tend to rush in and out of the market, in contrast to hedgers who stay in longer.
"Because commercial traders hold much larger and more stable positions than speculators," said CGES, "it only requires a small shift in the proportion of underlying physical exposure they choose to hedge to generate a large shift in the number of speculators needed to cover this change. Speculators as a group therefore appear to be much more active than hedgers when prices are changing rapidly, which creates the impression that the price is being driven more by speculators than hedgers.
"The truth is that futures markets require the presence of hedgers and speculators to operate efficiently and effectively. Neither side is solely responsible for the behavior of oil prices."
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