The slide in the oil price since early August might be seen as a setback for the Organisation of the Petroleum Exporting Countries. But it represents something of a victory for Opec’s biggest member, Saudi Arabia. High oil prices, fuelled in part by more speculative investors, have reawakened interest in substitutes ranging from liquefied coal to recycled chip-fat.
Until recently, Saudi’s response was to keep its wells pumping and insist that the market was well-supplied. Since August, traders have digested the reality of overflowing oil stocks, tensions easing in the Middle East and a lack of hurricanes. For the first time since March, speculators are running a short position overall in crude oil and refined products contracts in New York.
With some of the heat taken out of the market, Saudi has recently reduced output quietly to prevent a rout without encouraging the oil bulls by setting an explicit price floor. But Opec is a broad church, with divergent views on what constitutes a sustainable oil price. Hence, the drip-feed of statements over the past week regarding output cuts. Venezuela and Nigeria, which have been the most vocal, face fiscal deficits this year. Saudi’s surplus, meanwhile, should be equivalent to one-quarter of its gross domestic product. It could live with crude trading $10 below its current level. Saudi is also mindful of upcoming US elections, while Venezuela’s president needs high oil prices so he can thumb his nose at Washington.
This latest episode looks more like a breakdown in communication rather than discipline. Yet it shows that micro-managing the oil market is fraught with difficulty when prices are not rising. Non-Opec supply, stagnant for the past couple of years, should begin rising again in 2007. One thing is clear: in spite of potential output cuts and North Korea’s nuclear test, crude prices have stabilised rather than spiked back up. A big rise in geopolitical risk – Iran remains the swing factor – could always spark a rebound. But oil bulls should not expect too much from Opec’s latest pronouncements.
(FT.com, 9/10/06)