Oil market outlook mired in confusion

When the oil market is under such pressure, statements by powerful players can have a significant impact on prices. Saudi Arabia and OPEC are no strangers to this game.

OPEC says it is producing 2mbpd of oil above the agreed ceiling
OPEC says it is producing 2mbpd of oil above the agreed ceiling

Looking back over the past months, some observers see the host of statements to the press as at best confusing and at worst politically motivated.

The recent announcement by Saudi Arabia that it plans to raise output by 1.3 million barrels per day (mbpd), was trumpeted across the media. Seemingly this announcement was to ease market pressure and prices. Yet the actual wording of the announcement is less clear.

Oil minister Ali Naimi said, “The kingdom is well prepared to meet all the requirements of the international oil companies if they need additional volumes.”

In the geopolitical world, where lawyerspeak dominates discussions, does this mean that Saudi Arabia is actually producing an extra 1.3 million barrels per day? Today? Or does it mean that they could produce an extra 1.3mbpd? Or that in the future at some point they might produce an extra 1.3mbpd?

There are fears that demand foroil might be outstripping supply

There are fears that demand for
oil might be outstripping supply

Surely only the first interpretation is worthy of a press release to the world’s media, the other two are simple speculation. Because theoretically, with 130 billion barrels of “proven developed” reserves, Saudi Arabia could produce huge quantities of oil. This does not mean that they are producing, or will do so in the future.

Saudi desperation?

“I don’t know a single person who believes the Saudi line,” oil analyst Bruce Evers of Investec Securities in London told Aljazeera.net.

“The Saudis are desperately trying to dampen the price ahead of the [US] election in November. They are using all the cards up their sleeve.”

“They were still reeling from the price drop of the late 1980s and … have underinvested in their production capacity. Now demand growth has caught them out”

Bruce Evers, Investec Securities, London

The announcement by Saudi Arabia overshadowed a near simultaneous release by the International Energy Agency (IEA). The IEA announcement was in the morning, the Saudi announcement in the afternoon. Of the same day.

The IEA report made less calming reading for the markets. They claimed that global consumption had risen by 2.4mbpd in 2004. In one year. And that next year, 2005, it was set to increase by another 1.8mbpd. A cumulative total of  4.2mbpd extra in just 24 months.

So where does Saudi Arabia’s “preparedness” to supply an extra 1.3mbpd fit into that equation? Why did Saudi release this idea to the press a few hours after the IEA report? Coincidence?

“It smacks of desperation on the part of the Saudis,” says Evers. “I have no sympathy with them. They were still reeling from the price drop of the late Eighties and as a result have underinvested in their production capacity. Now demand growth has caught them out.”

Pledges obscured

But if you think this one Saudi statement is a little confusing, then you are yet to enter the maze of predictions, announcements and statistics that further obscure both the Saudi and OPEC promises.

Frequent attacks on pipelines inIraq too have affected prices

Frequent attacks on pipelines in
Iraq too have affected prices

On 3 June OPEC announced an increase of production. By 2mbpd from 1 July and then by a further 500,000 bpd from 1 August. Both deadlines have now been passed and the price of oil has not neither held at its June price of around $38, nor fallen. Instead it has increased to over $46. Yet all the extra irritants to the markets – Yukos, Iraq, Nigeria and so on – were very much around in June.

This would be destabilising enough if it were not for another OPEC release on 22 July in Vienna.

In addition to the two proposed increases in output, spokesman Indonesian Oil Minister Purnomo Yusgiantoro told the world’s press that OPEC was in fact “currently producing some 2mbpd above the agreed ceiling. This should not be seen as a violation of our production agreement, but instead as a positive … to the current market situation”.

Quota busting

So according to OPEC itself, its members are already quota busting. Which they say should “not be seen as a violation of our production agreement”. They say they are producing more than they agreed anyway.

So, does the 3 June announcement of an increase of 2.5mbpd include this quota busting? If it does that means that OPEC had huge, previously unstated, spare capacity. If so, why are prices still so high?

“[OPEC’s current output]should not be seen as a violation of our production agreement, but instead as a positive … to the current market situation”

Indonesian Oil Minister Purnomo Yusgiantoro

Or does it mean that OPEC countries were actually only adding 500,000bpd, which is far more worrying for the markets. Judging by the price increase since 3 June, it would appear the financial institutions, who bank on oil, see it as the latter.

Of course, although all oil-producing countries would deny it, could there be some incentive for quota busting when prices are so high? Such as making hay while the sun shines?

As a basic guide at the start of the year, Saudi Arabia claimed a daily production quota of 8.5mbpd. At the end of May following a call from the G8 to produce more, straightaway Minister Ali Naimi said an “extra 600,000bpd” were to be produced.

That would take the Saudi output to 9.1mbpd. This was followed by the most recent Saudi announcement of another possible 1.3mbpd. That would take Saudi Arabia to just under 10.5mbpd which everyone, Saudi Aramco included, agrees is their maximum possible output.

Struggles ahead

But where does that leave the last two OPEC production hikes announced on 3 June? Where does it leave the admission of quota busting? Are we to believe that Saudi Arabia did not contribute to any of the OPEC production increases? Then who did?

Are OPEC’s onflicting statementsadding to the market’s volatility?

Are OPEC’s onflicting statements
adding to the market’s volatility?

“Basically demand growth has caught them on the hop,” says Evers. “If the IEA are right and demand continues to grow around 1.5mbpd over the next five years, they are going to have to find in the region of another 7mbpd. That is going to be a real struggle. But in the past five years the IEA have also consistently underestimated demand.”

Now, as prices hit $47 – a record – the latest OPEC announcement on 18 August is even more difficult to work out. They now say output has been “increased by 599,000bpd in July”.

Is that 600,000 (announced in May) plus 2.5 million (announced on 3 June) plus another 599,000? Plus two million quota busting? Plus some more from Saudi Arabia? Why did they announce increases of 2mbpd from 1 July and now say it was only 599,000?

Market uncertainty

With such a plethora of conflicting announcements, it is little wonder the markets remain so volatile.

Estimates of Saudi reserves are also fuzzy. On 27 April 2004 Abdallah Jumah, President and CEO of Saudi Aramco, speaking to the Centre for Strategic and International Studies and US-Saudi Arabian Business Council, said that the Saudis’ “proven reserves” were “260 billion barrels.That’s with a B”.

“[Saudi estimates] of future oil reserves could well reach in the rang
e of 340 or 360 billion barrels. … that translate(s) into a resource to production ratio of
more than 110 years”

Abdallah Jumah,
President & CEO,
Saudi Aramco

Yet just a few days ago, recently retired executive vice-president of Saudi Aramco, Sadad Al Husseini, said “proven reserves” were “130 billion barrels”. Presumably also “with a B”.

Yet in April Abdallah Jumah went on to claim that Saudi estimates “of future oil reserves could well reach in the range of 340 or 360 billion barrels. And based on our current production rate, that translate(s) into a resource to production ratio of more than 110 years”.

If he is right we have little to worry about. But although OPEC, the Saudi government and Saudi Aramco’s multiple announcements all say there is no problem, there is a major one. The market simply does not believe them.

“I think oil prices are going to stay high for a lot longer than is assumed,” Bruce Evers concludes. “The question marks over the ageing Saudi fields and the promises of spare capacity are going to mean a lot of sweaty people, because the figures just don’t stack up.”

Source : Al Jazeera

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