RIYADH, Saudi Arabia (ResourceInvestor.com) -- Although analysts are fighting with the causes and effects of current high oil prices, OPEC energy ministers and officials are keeping a low profile. The current attitude of OPEC has been focusing on increasing the blame game of third parties involved. As has been stated by several ministers at yesterday's and today's ministerial meetings, the causes of current high prices are to be found in the increased influence of the financial markets on price settings.
As Pierre Terzian, owner of Paris-based consultancy Petrostrategies, stated, based on his analysis of the financial markets, especially the role and impact of the futures market, instability in the crude oil market has been increasing since 2004, when massive investments were placed by hedge funds and pension funds. Terzian argued that this proves that the influence of "speculators" or "non-commercial parties" is one of the main causes. OPEC will love this analysis, as it supports the cartel's current political stand.
However, Terzian and others currently backing up OPEC's price analysis are ignoring the fundamentals of the market which have been behind the crude price increase. It is not financial parties that are forming the crude oil market but the still unresolved issues of reserves, the disappearance of spare capacity and the unexpected high growth of demand globally. As long as OPEC will not confront these issues, in public or via increased transparency, the market will remain in a flux, leaving enough leeway for speculators to become interested.
In a totally transparent market, where the only price shapers are demand and supply factors, in cooperation with a more in-depth knowledge of available reserves, there will be much less interest for financial players to take part. A stable oil market does not generate the additional yield on investment currently attracting these new players.
The only reason why hedge funds and pension funds have entered the commodities markets is based on the fact that instability generates upwards and downwards volatility. Volatility means to a real trader an opportunity, not a threat. A sharp and rational financial analysis gives enough room for short-term attractive yields, which are not being able to be made on the stock and bond markets. It is out of order to blame the new players for shaping a market to be the cause of current price levels. Analysts and oil sector officials are agreeing that as long as the oil cartel is not able to step up its efforts to increase production potential and to show a willingness to increase production, volatility will be a fact of life.
In the coming weekend, OPEC could be facing another crisis. Even though until now the oil cartel has been showing a united face - with the most gentle and positive statements being made to all member countries - some fireworks could still be popping up.
During the weekend, two of the world's most aggressive leaders, Hugo Chavez of Venezuela and Mahmoud Ahmedinejad of Iran are presenting themselves to the international media. It can be expected that the two leaders will use the stage to address the world, attacking in their normal way of diplomacy Western countries as the real culprits behind the price increases. The two hardliners will also be supporting ideas to keep production quotas at current levels, giving them more financial power to keep their dreams going.
If one thing has become clear the last two days, OPEC is still searching for a solution - it has lost the power to shape the market. Instead of addressing issues to strengthen its own organisation via digging into the ongoing issues, the cartel opts to target outside developments. It seems to be easier to put blame on third parties than to admit its own weakness.
