Opec struggles to contain the beast within
By Kevin Morrison in Isfahan, Iran
Published: March 18 2005 11:47 | Last updated: March 18 2005 21:36
The Organisation of the Petroleum Exporting Countries has given speculators a very good reason to buy crude futures this week after sending a strong signal that it is concerned about supplies keeping up with demand in the second half of the year.
This was certainly not the market reaction the cartel wanted. Many members would shudder at the thought of giving hedge funds a reason to make more money from trading oil, preferring prices to stabilise as because rapid increases could ultimately lead to large-scale demand destruction.
US benchmark crude futures hit a peak of $57.60 a barrel on Thursday, while Brent hit $56.15 a barrel, up $1.12 on the same day. The WTI price in real terms, adjusted for inflation, is close to prices seen in the first oil shock in the 1970s and above those experienced during the Gulf War.
The price surge was pushed partly by Opec’s decision to immediately increase its output ceiling by 500,000 barrels a day to 27.5m b/d, and an option to add another 500,000 b/d if prices remain high. The other factor was a surprise drop in heating oil and petrol stocks in the US.
“The market’s response to this increase reflects Opec’s concerns and the lack of options that the organisation faces in 2005,” said PFC, a Washington-based energy consultancy.
Opec is being pushed into a corner now. Only a month ago it was going to trim its production quota in line with the usual dip in demand during the northern hemisphere spring. A week ago, the talk was of no-change to the official output ceiling. Both choices were viewed as supportive of high nominal oil prices.
But prices still rose in spite of the quota increase and a pledge from the cartel’s biggest producer Saudi Arabia that it will would boost output next month from its current rate of 9.5m b/d. This means that whatever Opec does right now, it appears unable to drag prices lower.
“By talking about its concerns, Opec has reinforced the market’s bullish sentiment,” said the PFC report.
The main concerns are lack of spare capacity. Should Opec pump more oil, it reduces the world’s spare production capacity leaving it vulnerable to price spikes should severe supply disruptions like Hurricane Ivan or sabotage attacks in Iraq arise.
PFC says another factor why any increase in Opec production is unlikely to drag prices lower is that the extra output will be the heavy and medium sour crudes, which carry a heavier sulphur content and are not suitable for producing petrol.
Petrol, which begins to drive the energy complex by the end of spring, is coming under stricter emissions standards around the world and refiners prefer to use light sweet crudes such as WTI and Brent.
The high oil price cannot be just blamed on Opec, as the lack of investment in refinery capacity by the major oil companies is another significant contributor to the price rise. But all parts of the industry have been surprised by the rate of increase in world oil consumption, which is estimated to have increased by 10m b/d by the end of the year from the 2000 average. It took the whole of the 1990s to increase by the same magnitude, even though oil prices averaged only a third of the current price during that time.
“Every time energy prices have rocketed, we have had inflation, recession or both,” says Hanover, a US daily oil report. “People keep talking about oil prices in terms of 1980 dollars, but we honestly do not know anyone who can show us one of those dollars still in his or her pockets.” It adds: “We believe in spending-pocket economics. Higher energy prices are sucking millions of dollars out of consumers’ pockets each and every day.”
By the close in New York on Friday, Nymex WTI was up 32 cents to $56.72 a barrel but was up. Brent crude closed 53 cents higher at $55.59.
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Thanks Edward Miller et al for your helpful responses to my prior post.
The bolded part of the above article is what led me to make the comment about WTI being the raw material needed to make gasoline at a profit. Taking everyone's comments in mind and re-reading the article I take it that I was overstating the case, i.e. you can use heavy sour crude to make gasoline and still make money (maybe even good money) if you have a complex refinery and the spread between the 2 grades is high enough.
Regarding making dumb statements (or asking dumb questions), I have been doing this with regularity on various internet investment chat boards such as this one for about the last 10 years, and have learned an immense amount of information about the oil & gas industry, and with a huge amount of luck have been able to make more than a coupla profitable investments as a consequence. I reserve the right to continue doing this. |
