CAPE TOWN (ResourceInvestor.com) -- Heads of state and oil ministers from the 12 Organization of Petroleum Exporting Countries (OPEC) members will be meeting in Riyadh Nov. 17-18 for a rare summit, the third in the cartel’s history, at which they will hammer out the details of what is to be a historic “declaration of principles.”
Though petrodollar coffers are overflowing, there is no shortage of ominous clouds on the horizon providing a backdrop to the meeting: The diplomatic breakdown associated with Iran building up its nuclear technology capabilities, the ongoing war on terrorism along with conflict in Iraq, Afghanistan, as well as Nigeria and other OPEC nations, the increasing likelihood of a global economic slowdown and the U.S. dollar losing its grip as the world’s reserve currency among them.
Surging oil and energy prices have yet to snuff out economic growth or trigger significant inflationary increases in key developed and developing economies despite record-setting prices, not only for oil, but across a range of key industrial metals and minerals, not to mention agricultural commodities.
Ongoing rapid economic growth in the developing, so-called BRIC nations (Brazil, Russia, India and China), along with ongoing technology and process improvements and capital investment by transnational corporations, easy monetary policies and credit conditions in key economic powers are the commonly cited underpinnings of a current period of relative economic growth and stability that increasingly shows signs of coming to an end.
Stabilizing Prices, Petroleum and the Environment
Oil price stabilization will be the biggest issue on OPEC’s agenda when oil ministers meet to pave the way for the culminating meeting of government leaders. Environmental politics, policies and technology innovation are also high on the agenda, according to OPEC communications.
The ministers and others will begin their meeting by reviewing current conditions and future prospects in oil and gas markets. "Energy and the environment" and "Energy for sustainable development" are the next two items on the agenda. The remainder of the two-day meeting will be devoted to "The Role of OPEC in Providing Petroleum and Promoting Stability," which will be a review of measures that could help stabilize prices, according to the OPEC meeting outline.
OPEC’s efforts to ensure adequate supplies and stabilize oil prices is a theme that representatives such as the head of its petroleum market analysis department, Mohammad Alipour-Jeddi, have been addressing at international meetings of late.
“OPEC would like to reiterate to the distinguished delegates attending the IMFC its continued commitment to maintaining oil market stability,” Alipour-Jeddi, said during his address at the IMF’s Annual Monetary and Financial Committee Meeting in Washington, D.C. Oct. 20.
“This commitment is exemplified in the recent decision taken at the OPEC Ministerial Conference to increase crude oil production despite considerable uncertainty about the actual market requirements. This decision provides a clear demonstration of the Organization’s ongoing concern about the health of the world economy, as well as its long-standing commitment to ensure adequate supplies in the market.”
OPEC decided to increase production by 500,000 barrels-a-day effective Nov. 1 at its September Ministerial Conference in Vienna. OPEC oil ministers are due to meet again and review production and supply and demand conditions at their next meeting, which will be held Dec. 5 in Abu Dhabi.
OPEC members also continue to invest in expanding production capacity, Alipour-Jeddi noted.
“As a result, OPEC spare capacity in the coming quarters is expected to rise above 10%, providing a comfortable cushion to meet unexpected supply shortages. Such levels should reassure the market that OPEC is ready and willing to meet the needs of the world oil market,” he said at the IMF MFC meeting.
The Oil Price Outlook
Goldman Sachs analysts, along with other advisors and investors, believe that tight supplies will drive crude prices above $100 a barrel, however.
"The big question that everyone wants to know is will we see $100 (a) barrel on this run," Philip Flynn, an analyst at Alaron Trading Corp. in Chicago, wrote in an Associated Press report. "The strength of this market seems to be gaining momentum and I have learned a long time ago to respect a raging bull.... But I also know that these types of runs can end quickly and feel like a crash once the sell-off begins."
Prices for light, sweet crude oil resumed what seems like an inexorable rise during European market trading on the New York Mercantile Exchange electronic trading system, rising 41 cents to $93.90 a barrel Friday afternoon. The contract had risen to set a new trading high at $96.24 on Thursday before falling back and settling at $93.49.
Geopolitical threats, such as Turkey’s military actions against Kurds in northern Iraq, or declining stockpiles are the likely catalysts for a surge to and beyond the $100-a-barrel mark, Tetsu Emori, commodity markets fund manager at Tokyo’s ASTMAX Futures Co., was quoted as saying in the AP report.
"Some people want to see (crude hit) the $100 level, but I don't think that level will be sustainable because it is simply too expensive."
Limited Refining Capacity & Tight Supplies
Limited refining capacity and the resulting tightness in downstream petroleum product prices are among the main factors contributing to the rapid price rises and high volatility seen in the oil markets since late summer, according to OPEC.
These have been exacerbated by a series of unexpected refinery outages in the U.S. Taken together they have “led to exceptionally low gasoline inventories, particularly over the driving season,” Alipour-Jeddi said to IMF MFC meeting attendees.
“Geopolitical developments and the Atlantic storm season have also contributed to higher prices as have increased speculative activity in the crude oil futures market, which magnifies the impact of other factors. The weaker dollar also supported prices, encouraging new investment in the futures market from non-dollar investors.
“It should be noted that throughout this period, crude oil inventories have remained at comfortable levels, at time well-above the five-year range, an indication that the crude oil market continues to be well supplied,” he noted.
The Multiplier Effect
Fears of looming jumps in inflation rates, a plummeting U.S. dollar and the ongoing oil price rise have led to the resumption of rapidly rising gold prices. Continuing rises in oil and other key commodity prices raise the likelihood of economic slowdowns in the world’s largest oil-consuming economies, however.
U.S. GDP growth grew at an unexpectedly healthy 3.5% rate during Q3, allaying some fears of a sharp economic slowdown though concerns about a credit crunch and economic slowdown in the U.S. sparked by the sub-prime mortgage crisis and a weakening housing market remain.
Japan’s economy minister Hiroko Ota on Friday warned that declining housing investment and high oil prices could put pressure on growth in the world’s second largest economy, according to an Associated Press report.
"We see downside risks to the economy with more emphasis ... I am concerned about declining housing investment and high oil prices," Ota said. "Japan's economy is recovering, but we need pay attention to the U.S. economy."
OPEC’s own global economic forecasts are encouraging ones, however. “[They] reflect a continued strong world economy, with growth expected at 5.1% in 2007 and at a slightly lower but still healthy pace of 4.9% in 2008. As it is still too early to gauge the extent of the negative effects of the current credit crunch on economic prospects in the U.S. and globally, there is a need to continue to carefully monitor developments in the financial markets and their impact on the real economy,” Alipour-Jeddi said at the IMF MFC meeting.
OPEC’s public statements regarding the cartel’s position vis-à-vis balancing oil supply and demand are encouraging, Wharton finance professor Jeremy Siegel said during a July Knowledge@Wharton interview when oil prices were some US$ 20 lower.
“…We had some OPEC officials saying that they are also worried about the price getting too high. It's in the mid to upper 70s right now. They actually mentioned a price in the 60s as where they'd prefer it, which I think is good.
“…With the dollar going down, it's more of a risk on the upside, because when you quote it in dollars it looks more to the Europeans (in euros) that it hasn't gone up that much. But to the Americans (in dollars) it has…We think that it is in their (OPEC’s) interest not to let oil get too high, because if it (the price of oil) gets too high then all sorts of measures to conserve and curb imports might ultimately hurt them…They want to keep it high, but not so high that governments will take extreme measures to reduce consumption,” Siegel commented.
