Global petro-luminaries such as OPEC's chair Purnomo Yusgiantoro, Lord Browne of BP, Saudi Aramco and others have insisted there is no problem with supply.

 

Yet their words have been routinely ignored by the traders.

 

For the first time in 16 years, US commercial inventories dropped for eight weeks in a row. The markets had expected a fall of around five to seven million barrels. Instead, the drop was 9.1 million.

 

Arguably even worse, other distillates and heating oil inventories also fell. This prompted more market rumours of a release of US Strategic Reserves, a measure Vice President Cheney said would only happen in "a national crisis".

 

Yet recently Yusgiantoro told the World Energy Congress in Sydney there was "enough oil in the market" and that global production was "1.5 million barrels (per) day above demand". It appears the market does not believe him.

 

Claims questioned

 

"It's rubbish," says Bruce Evers, oil analyst at Investec Bank in London. "They are trying to calm the market. If they say there is no spare production capacity, prices will go through the roof."

 

OPEC statements have failed to
impress the commodity market

Indeed, even basic calculations must cast some doubt on OPEC's pronouncements. The International Energy Agency (IEA) estimate global oil demand in 2004/05 will rise by 4.3 million barrels per day (mbpd) - 2.5 mbpd in 2004 and 1.8 mbpd.

 

At a conservative two year average that means the world is consuming at least 1,576,469.8 mbpd more than it was on 1 January 2004.

 

If one were to take Yusgiantoro's figures as accurate, this would mean that at the start of the year there was over three million barrels per day spare capacity in the marketplace. Something no one believes.

 

"OPEC just keep repeating the same old things over and over again," says Deborah White, senior energy economist at Societe Generale in Paris.

 

"They say 'we cross our heart and hope to die that there is 1.5 million barrels of spare capacity in Saudi Arabia'. But at the same time even (Saudi Oil Minister) Ali Naimi says it is impossible to know.

 

"We also think the International Energy Agency figures are on the low side. We go on [figures of] 2.7 mbpd in 2004 and 2.5 mbpd in 2005."

 

Beyond control?

 

Despite repeated pronouncements about an increase in shipments, OPEC appears to be losing its ability to influence the price of oil.

 

Its mid-September AGM in Vienna promised further increases in supply, yet within seven days prices had rebounded to within a few cents of record highs.

 

"There can be more production from Africa and the Far East, the Middle East and especially Saudi Arabia. But the real question is whether they will invest quickly enough to do it
at a sensible speed"

Bruce Evers,
Oil Analyst,
Investec Bank, London

"It is no longer within the power of OPEC to keep prices at $28 a barrel," says Societe Generale economist White. "OPEC can only set the floor, not the ceiling."

 

Investec Bank analyst Evers agrees. "These US inventory figures tell me that Saudi is struggling with light crude [production]. The stocks that they said would make it to the markets just don't seem to be appearing and demand is far far stronger than the figures say. It's a fact of life. This doesn't bode well."

 

In part these high prices are spurred on by the effects of Hurricane Ivan in the Caribbean. Indeed, traders may have yet to fully price in the full effects of the rogue storm, some of which are still unfolding.

 

Demand still growing

 

On Wednesday the US Interior Department announced that seven oil platforms in the Caribbean were completely destroyed, with four sunk.

 

As well as these seven, another 13 are currently leaking their precious commodity into the sea. It could hardly have come at a worse time.

 

Because, in addition to the almost comic aspect of Nigeria admitting that two impounded tankers accused of oil smuggling "have disappeared", China has continued to announce an increase in imports.

 

The OPEC basket price of $22-28
per barrel belongs in the past

The Chinese Government's General Administration of Customs quietly announced a 39.2% year on-year rise. That is around 2.21 mbpd.

 

Although Chinese and Indian oil demand growth does appear to be slowing, the uncertainty alone will only fuel more price fears. As will the crisis at Russian producers Yukos.

 

"There can be more production from Africa and the Far East, the Middle East and especially Saudi Arabia," says White of Societe Generale. "But the real question is whether they will invest quickly enough to do it at a sensible speed.

 

"As well as that majors like BP, Shell and Total are still investing in new production as if oil prices were still at $20 or $22. Their shareholders are demanding returns, which means less investment in new fields."

 

Historical artefact

 

There may be some small help on the horizon. Some refineries, where crude is turned into petrol and/or stripped of its impurities, are in the process of their annual maintenance.

 

Others are changing their modus operandi to take in some of the heavier, more sulphurous, crude currently being offered at a discount by Saudi Arabia.

 

"There can be more production from Africa and the Far East, the Middle East and especially Saudi Arabia. But the real question is whether they will invest quickly enough to do it
at a sensible speed"

Deborah White,
Senior Energy Economist,
Societe Generale, Paris

Yet even so the OPEC price basket of $22 to $28 per barrel seems increasingly like a historical artefact.

 

"And no one really wants the heavy crude," Evers says. "It's just too expensive to convert. Basically, in the current oil market there is absolutely no room for error."

 

Even if new refinery measures brought short-term comfort, the problem remains that global supply is close, if not matching, global demand.

 

Previous disruptions, even sinking rigs and broken pipelines, could be coped with when there was in excess of 5% spare capacity. Not now.

 

Quotas flouted

 

"We saw a drawdown in stocks in every single US region, not just the Gulf Coast and those affected by Hurricane Ivan," says White.

 

"With these high prices that exist now oil refineries do not want to spend money buying in crude that they are not going to use straight away.

 

Repeated Saudi promises have
failed to calm jittery markets

"They want to have exactly the right amount to fulfil their just-in-time operations. And there is no spare refinery capacity, demand has outstripped all expectations."

 

Repeated promises of increased production by Saudi Arabia and OPEC have failed to calm the markets. Some even doubt those production increases have occurred at all as inventories fail to fill. OPEC has already admitted that its members were breaking their own stipulated quotas.

 

Even by the IEA demand figures, deemed far too low by analysts, the world needs to produce another 2,723,530.2 bpd by the end of 2005 just in order to stand still.

 

Let alone create spare capacity. Where that (and future projected IEA increases of around 1.5 mbpd after 2005) can be found, may become the central economic question of the early 21st century. Maybe it already is.