Monitoring the Oil Market: Moin A Siddiqi Reports on the Latest Developments in the Global Oil Industry. (Business & Finance)

By Siddiqi, Moin A. | The Middle East, December 2001 | Go to article overview

Monitoring the Oil Market: Moin A Siddiqi Reports on the Latest Developments in the Global Oil Industry. (Business & Finance)


Siddiqi, Moin A., The Middle East


A flagging global economy, resulting in dwindling fuel demand and an increasingly unstable geopolitical environment in the wake of 11 September, is undermining the Organisation of Petroleum Exporting Countries (OPEC) capabilities to dictate oil markets. Consequently, crude prices have weakened substantially, with December Brent contact falling to a two-year low of $19.65 a barrel on 1 November.

OPEC's firm "micro-management" of oil markets had successfully kept the cartel's reference price within a $22-$28 band over the past two years, thereby protecting the earnings of member-countries. The OPEC basket price -- made up of seven varieties of crude -- averaged $24.5 in the first three-quarters of 2001, prompting the US Energy Intelligence Group to comment: "OPEC has evolved into an efficient management system." Last March, the US Energy Information Administration (EIA) estimated OPEC revenues this year at $216 billion, compared with $225 billion in 2000.

The cartel's pro-active actions show the resolve of core members (Saudi Arabia, Iran and Venezuela) to keep chopping output until it balances global demand-and-supply. Between February-September of this year, OPEC-10 collective output, (excluding sanction-bound Iraq) was cut by 3.5 million barrels a day (b/d), representing 13 per cent of global output, in order to accommodate sluggish demand growth and prevent booming inventories.

However, OPEC's micro-management strategy could pose risks to both consumers and producers. The Centre for Global Energy Studies (CGES) warned: "Pursuit of higher prices may very well work in the short-term, but in the long-term, the Organisation will pay the price of reduced demand for oil and higher non-OPEC production. The International Energy Agency (IEA) also commented: "Apparent success in sustaining prices will attract investment into the generation of new oil supplies from alternative regions that would not, normally, be competitive. Sustained high oil prices will damage economic activity and stimulate fuel switching. Then oil prices will start to fall."

ECONOMIC DOWNTURN

Following the 11 September attacks on the United States, the balance of power in oil markets has shifted from producers to consumers. The Petroleum Finance Company wrote: "What 11 September has changed is the price floor that OPEC can defend -- it will be very hard for OPEC to keep its basket at $25."

The world's largest oil consumer, America, is now in recession and tangible recovery is not anticipated until the second half of 2002. US oil demand in October dropped four per cent to 19.1 million b/d, largely due to the slump in air-and-road travel.

The global economy is experiencing its steepest deceleration since 1982, having slowed from a robust growth rate of 4.8 per cent in 2000 to estimations of between 1.4 per cent by the United Nations and 2.6 per cent from the International Monetary Fund.

Therefore, deteriorating prospects facing America, Europe and Japan (together representing 70 per cent of world's gross domestic product-GDP) are reducing petroleum consumption. Estimations for global oil demand growth in 2001 have been revised downward steeply. According to experts, every one per cent fall in world GDP, lowers oil usage by 400,000 b/d. OPEC and CGES project an annual demand increase of 640,000 b/d and 440,000 b/d respectively, whilst, the IEA's estimates of 120,000 b/d (down from 400,000 b/d in August) are extremely bearish. The Paris-based energy watchdog said: "Oil demand is set to slump after the attacks on the US hit air travel and dampened expectations for a rebound in global economic growth." By contrast, global demand over the past decade has risen by one-to-two million b/d.

Sickly economic conditions could undermine fuel consumption during the peak winter season. During past years, robust seasonal demand in the Northern Hemisphere winter normally sees additional growth of 2. …

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