What a Crock! - Opec concerned over falling oil prices!

Opec concerned over falling oil prices
By Carola Hoyos in Vienna

Published: September 10 2006 16:00 | Last updated: September 10 2006 16:00

Ministers of the Organisation of the Petroleum Exporting Countries arriving in Vienna on Sunday have indicated concern that oil prices may fall. Though the eleven-nation group is unlikely to officially reduce its production quota when it meets on Monday, the change in ministers’ tone could be a harbinger of things to come.

“Inventories are very comfortable, prices are coming down and nobody is concerned about a shortage of supply,” Ali Naimi, Saudi Arabia’s oil minister and Opec’s most powerful member, said as he arrived in Vienna.

At previous meetings Opec members, including Saudi Arabia, have voiced discomfort about oil prices being too high, threatening global economic growth. But there was little the group could do because its members were largely already producing at full capacity while high prices were prompted mainly by worries about sudden interruptions in supply caused by hurricanes or geopolitical tensions.

Now ministers no longer think oil prices, at around $67 a barrel, are too high. Instead they are concerned that the recent $10 drop in prices could be a sign that the market is at the beginning of a larger correction, one that could eventually impinge on oil producers’ revenues.

In the US, for example, sport utility vehicle sales fell 14 per cent in August, while sales of compact cars were up 18 per cent. Opec expects oil consumption in North America to increase by only 90,000 b/d in 2006, compared to the 230,000 b/d jump it experienced in 2005 and 520,000 b/d in 2004.

This would see Opec increasingly dependent on strong economic growth in China and other developing countries feeding demand for oil. But this brings back bad memories of 1997, when Asia’s financial crisis took Opec by surprise and the drop in demand from the region eventually pushed prices down to $10 a barrel. China, which in 2004 saw demand jump by 790,000 b/d, with other Asian countries adding another 430,000 b/d, is expected to register growth of 540,000 b/d this year.

No analyst is talking about a retreat to $10 per barrel, but even a slide to a more realistic $50 would displease many Opec ministers. To guard itself against a sudden oversupply in the market Opec is already producing 500,000 b/d below its quota of 28m b/d.

At the group’s meeting the ministers are likely to raise the possibility that they will have to take action at their next meeting in December. With oil prices still in the mid-$60 range, output cuts risk painting the group as a greedy cartel and enemy of the west.

Until their next meeting, ministers still have two months of hurricane spotting to do and three months to keep tabs on the unfolding diplomatic drama between the west and Iran. By then they should also have a better grasp of how cold the northern hemisphere’s winter will be and how much heating oil the US and Europe will need.



Copyright The Financial Times Limited 2006

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