Who’s to blame?
By Centre for Global Energy Studies
Posted: 22 October 2007
 Send this article
 Print this article
Oil prices have continued to set new records, breaking through $90 per barrel, while Opec continues to deny that market fundamentals are to blame and its Secretary General asserts that the market is ‘very well supplied’.
 Opec needs to put more oil onto the market, while its key producers must widen the discounts against benchmark grades for their heavy oils if they really want to bring down the price of oil from levels that the organisation itself says it does not favour.
Oil prices have continued to set new records, breaking through $90 per barrel, while Opec continues to deny that market fundamentals are to blame and its Secretary General asserts that the market is ‘very well supplied’.
The organisation places the blame for high oil prices on market speculators, persistent refinery bottlenecks, seasonal maintenance, geopolitical problems in the Middle East and fluctuations in the US Dollar — almost everything, in fact, except its own output policy. Attempting to link the most recent run-up in oil prices to the threat of Turkish military action in northern Iraq ignores the fact that Iraqi oil exports via the north are tiny compared with those from the south and are frequently interrupted by terrorist attacks.
Opec’s recent agreement to raise output by 0.5 mbpd from the beginning of November is, in the words of the CGES’ Chairman Sheikh Zaki Yamani, ‘too little, too late,’ who added that more Opec oil is needed ‘to reduce tension in the market as we approach winter.’
While all of the factors enumerated by Opec may have a degree of influence on the oil price, they cannot disguise the fact that the world has been kept short of oil this year. World oil production (including NGLs and refinery processing gains) was just 0.2
mbpd higher during the first nine months of 2007 than during the second half of 2005, whereas global oil demand increased by 1.3 mbpd over the same period.
Opec argues that OECD commercial stockcover of 53.5 days is comfortable, but this ignores the rapid downward trend in stocks. Global oil inventories are normally built up at a rate of around 1 mbpd over the two Northern Hemisphere summer quarters and drawn down again over the two winter quarters.
This is how the industry copes with the huge seasonal fluctuations in oil demand. This year, global inventories rose by less than 0.3 mbpd in 2Q07 and actually fell by nearly 0.3 mbpd during 3Q07, giving a small net decline in global oil inventories over the period.
This is not a market that is ‘in balance’.
The world certainly needs more upgrading capacity in the refining system, as demand for transport fuels continues to grow while the market for burning fuels contracts. Until that happens, heavy crude grades (the marginal source of supply) need to be sold at wider discounts to benchmark grades to make them attractive to owners of simple hydroskimming refineries (the source of marginal demand).
As price differentials narrowed, demand for heavy crude was choked off. This is not a reflection of a market that is well supplied, but of a market where producers are targeting only the high-value buyers — those with the ability to fully upgrade crude in sophisticated refineries.
To bring the oil price down from its current level, OPEC’s members need to put more oil onto the market and allow commercial inventories to be replenished. |
