This market is crazy, 3 months of articles about a pending glut and now they are worried about high prices because of tight supplies.
Oil Cartel May Be Forced
To Rethink Cut in Output
High Prices Could Prompt
OPEC to Increase Supply
Weeks After Tightening
OPEC is facing the prospect that it may have to boost oil production next month, barely three weeks after it decided to cut production, setting off a rise of about 17% in petroleum prices. But industry and financial analysts say the cartel may only be partly to blame for the price jump.
By Bhushan Bahree and Michael R. Sesit in Paris, and Susan Warren in Dallas
Senior officials of the Organization of Petroleum Exporting Countries said Wednesday that the supply reduction agreed to Sept. 24, of some 3.5%, would go ahead as planned Nov. 1. But if prices stay above the top end of OPEC's target price of $28 (€23.90) a barrel for the next three weeks, "we will take action immediately," one senior official said.
The OPEC price gauge -- for a basket of crude-oil varieties sold by cartel members -- ended Tuesday at $29.78 a barrel, marking the fourth consecutive close above the upper end of the target range. OPEC previously had agreed to increase oil supplies if prices stay above $28 a barrel for 20 successive trading days. That doesn't prevent OPEC ministers from acting before then. But senior officials, including ministers from Kuwait and Indonesia, are hoping the price jump will prove to be short-lived.
Some industry analysts say prices might soften. "I wouldn't be surprised to see us back under $30 a barrel [for U.S. benchmark crude] by mid-November," says Aaron Brady, an analyst at Energy Security Analysis Inc., in Wakefield, Massachusetts.
U.S. benchmark light, sweet crude is typically priced two dollars or more than the OPEC basket. On the New York Mercantile Exchange, U.S. benchmark crude for November delivery closed at $31.77 a barrel in trading on Wednesday, down five cents. North Sea benchmark Brent crude for November delivery closed at $30.88 a barrel on London's International Petroleum Exchange, up 19 cents.
The rise in oil prices in the past three weeks has been widely attributed to the usual suspects, the members of OPEC, as the cartel's production cut set off the recent run-up. But other forces are also buoying prices, including major central banks, rising global growth and speculative trading funds.
In their eagerness to underpin world economic growth and especially to avoid the specter of deflation, or falling prices, central banks in the U.S., Japan and Europe have eased monetary policy by cutting official interest rates and other steps. As a result, the banks are pumping more cash and credit into the economy than can be absorbed by companies or consumers looking to build factories or buy houses. Seeking to make a return on this money, investors often turn to financial markets, including commodities.
"There is a lot of money floating around looking for a home, especially after the bond-market meltdown this summer" says Peter Gignoux, head of the petroleum desk at Citigroup in London. "Oil is being lifted by the rising tide of commodity prices."
Basic materials such as lead, tin, zinc and cotton are also appreciating. This general rise in commodity prices largely reflects growing optimism about an upswing in economic activity, mostly focused on the U.S. "But it is also related to upward revisions of China's GDP [gross domestic product] forecasts," said Daragh Maher, a senior economist at ING Financial Markets in London. China is a major consumer of industrial commodities and the world's second largest user of oil.
Despite the strong demand for oil, some industry analysts say they are perplexed by recent movements in oil-futures markets. That is because supply is also increasing in the world's biggest market, the U.S. Oil shipments into the U.S. continue to run at high rates. OPEC's planned cuts won't be reflected in lower deliveries to the U.S. until the end of the year, at the earliest, because of the time taken by tankers to transport oil from the Middle East.
"I can't explain it," says Roger Diwan, an analyst at Washington-based PFC Energy. "Prices are well above where they should be. Supply is sufficient and OPEC doesn't need to put out more oil."
But another influence in the market is the large speculative funds that invest in oil to profit on price swings. Those players complicate OPEC's attempt to manage markets, as funds can act much faster than the cartel.
OPEC may have to announce a supply increase just to cool red-hot prices. But if large funds then move out of oil, OPEC may have to move to cut supply once again, for fear that prices will plunge.
"We don't like it, prices jumping this way today, jumping that way tomorrow, because funds change their minds," said one OPEC official.
Write to Bhushan Bahree at bhushan.bahree@wsj.com, Michael R. Sesit at michael.sesit@wsj.com and Susan Warren at susan.warren |
