Crude price pressure has to continue
The Globe & Mail, Thursday, June 17
By Mathew Ingram
Some investors may be under the impression the oil crisis is over. After all, the price of crude has fallen as low as $37 (U.S.) a barrel from $42 a couple of weeks ago, thanks to promises from Saudi Arabia that it will boost production. Even the news of pipeline explosions in Iraq and lower-than-expected additions to U.S. crude stockpiles failed to push prices up to any great extent yesterday.
But some industry experts feel the market has traded irrational fear for irrational complacency. With the Saudis now pumping more oil, they say, there is little spare capacity should supply from Iraq be disrupted for more than a few weeks.
According to news reports, saboteurs blew up two pipelines north of the town of Faw yesterday -- pipelines that had already been the target of attacks on Tuesday. A senior security officer with Iraq's Northern Oil Co. was also killed in an ambush.
The latest blasts crippled the pipelines, an Iraqi spokesman said and, as a result, the movement of oil to the terminal in the southern Gulf port of Basra "has completely stopped." Meanwhile, the U.S. Energy Department said crude stockpiles rose by 800,000 barrels for the latest week -- compared with estimates of 1.5 million.
The strategy at Organization of Petroleum Exporting Countries in the wake of the Iraq attacks seems to be a typical one: Say one thing and do another. The global oil cartel said Monday that a supply disruption was no problem, and that Saudi Arabia -- the only OPEC member with spare production capacity -- would be more than able to make up for any drop in Iraqi exports. A Saudi promise to boost its output by more than 10 per cent to 9.1 million barrels a day was what originally helped push oil back to the $37 range from $42. At the same time, however, OPEC president Purnomo Ysgiantoro said yesterday that he was writing a letter to non-OPEC producers such as Russia asking them to raise production.
The point is not just that Russia, Angola and Mexico are in no position to produce much more oil -- a senior Russian oil minister, for example, said the country didn't "have a tap that we can just turn on and off; we are producing exactly as much as we can." The point is this: Why is OPEC busy asking Russia and other non-cartel producers to boost their production if Saudi Arabia has everything under control? In the not-too-distant past, asking Russia to produce more crude would have been the last thing on earth the Saudis wanted to do, because it would have meant giving Russia a greater share of the global oil market.
Now, however, OPEC needs all the help it can get if crude prices aren't going to spike again. The Saudis are in the process of boosting their output to 9.1 million barrels a day and, according to official estimates, they could come up with another 1.4 million barrels if necessary without having to do a lot of work expanding their existing oil fields. But even that wouldn't make up for the loss of 1.8 million barrels a day from Iraq. Such a disruption may not be a huge strain on the market in the short term, but it could become one before long.
Energy Intelligence analyst Axel Busch told CNN yesterday that the amount of oil being blocked in Iraq almost matches available spare capacity in OPEC, and "it wouldn't take a lot to push up against the buffers as there's not much slack. If there's not enough to go around, then the sky's the limit."
Even some within OPEC are concerned. A source told Dow Jones that "there is very little leverage for extra barrels, despite what some [within OPEC] are saying." But the cartel continues to maintain that it will have no difficulty keeping up.
Those reassurances seem to be enough to placate traders for now. "We're all waiting for the Saudi barrels to arrive, which allows us to shrug off news we are getting from Iraq," said Phil Flynn, a senior energy trader for Alaron Trading Corp. in Chicago.
With OPEC production reaching its limits and other producers not able to fill the void, however, that complacency could face a serious test if Iraq's oil exports are put on hold for much longer than a week or two. At the very least, the supply-demand equation for crude is likely to remain extremely tight, despite OPEC's soothing noises.
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