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Opec Loses Its Grip on World Oil Prices
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Opec Loses Its Grip on World Oil Prices
IT all seemed rather pointless. Eleven of the worldīs most powerful energy ministers made their way to Viennaīs most expensive hotels from every corner of the earth, trailed by large entourages, every nuance of every word and every gesture scrutinised by a legion of international press.
And what for? Even Sheikh Ahmad al-Fahd al-Sabah, president of the Opec cartel, admitted the 500,000 extra barrels per day added to Opecīs quota on Wednesday was pure symbolism. All the cartel did was bring the official target in line with the 28m bpd being pumped anyway in May.
John Van Schaik at Energy Intelligence in New York said: "Opec effectively lost control more than a year ago. As a force able to micro-manage markets, Opec is done for."
The cartel is pumping flat out. Only Saudi Arabia has meaningful amounts of extra oil to put on the market, and thatīs the wrong sort of oil.
All the Saudis have to offer is sulphurous heavy crude. Every refinery capable of breaking this down into petrol and gasoline is already pumping through as much crude as it can to cash in on sky- high petrol prices.
Opec said it would put a further 500,000 bpd on the market if prices remained too high between now and September. But the Saudis had already made it clear they were willing to dig into their spare 1.5m bpd of potential production, but could not find anyone willing to buy at todayīs prices.
It shouldnīt be a surprise, then, that the oil market shrugged off the news, with oil prices nearing $57 a barrel (Pounds 31, E47)in New York on Thursday.
So if the cartel is no longer moving markets, why bother meeting? "Itīs always fun to go meet in Vienna," says Jan Stewart, head of energy research at brokerage Fima USA LLC. "Riyadh isnīt a nice place to be in the middle of June. And thereīs all that shopping to do."
He argues Opec still has work to do. For one, the market needs to know how the cartel is thinking and itīs not quite as powerless as it seems.
Last week the cartel blamed a shortage of oil refineries in consuming countries rather than a shortage of oil from producers for keeping the price at $50. Refiners need to take advantage of the lull in demand as the market softens during the European and US summer to stockpile fuels for winter. All Opec can do is pump enough extra crude to allow them to do this and this it has pledged to do.
Al-Sabah said Opec was working on its wells to increase its production capacity from 32m bpd to 33m bpd by the end of the year, giving it a comfortable capacity cushion if the winter demand for Opec oil is the 30.5m bpd expected.
Opec also meets to let the world know how it feels about the oil price. What was abundantly clear last week was ill-concealed glee. Record oil prices have flooded their state coffers with cash but a damaging world economic slowdown still hasnīt come to pass.
Actually, $50 oil suits Opec rather well. Al-Sabah told the European Union before the meeting that $50 a barrel was "fair". And on Wednesday Opec ministers said they would only release more oil if the "Opec basket", an average of the price of Opec crudes, traded above $50 a barrel for days. Translated to the New York market, this means $58 a barrel.
But is Opec really so powerless anyway? Stewart argues not. "The Saudi excuse is that companies donīt want to buy at these prices. But they set the prices - their own crude is priced at a fixed differential to Brent."
So all the Saudis would have to do is change the contract terms so its crude would be cheaper and it would have buyers queuing up around the block, he argues. But that could mean a big cut in revenues. Maybe Opec has a reason to meet after all.
Source: Sunday Business; London (UK)
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