PARIS (ResourceInvestor.com) -- It was that time of year again when Organisation of Petroleum Exporting Countries (OPEC) like to get together and convince us they are in control of the oil markets. But they are not.
If we can remember back only two and a half years they lost control of the oil market completely. When they decided to sit back and wait for oil to fall back to their stated preferred basket price of $22-$28 per barrel. It never did.
So now we have to learn to decipher a much more confused and self conscious message form OPEC, notwithstanding the odd outburst. We even had a statement which started off saying “having reviewed the oil market outlook….”
Well, we would kind of hope that you did not really need to review it. That you were right on top of it considering you have around 30 million barrels a day of production at your welltips. But no.
Instead, it carries on, “the conference observed that the world economic performance in 2007 is expected to remain relatively firm, albeit slightly lower than in 2006, reflecting, inter alia, the impact of higher interest rates. The conference also noted that, although all indicators clearly show that the market remains well-supplied with crude oil and that OECD commercial oil stocks are healthy, overall oil market volatility is likely to continue.”
It’s that last bit that can tell you more about OPEC than the rest of the buffoonery that goes on for 48 hours at their meetings - all the chats in hallways and people gazing at each others badges to see if they are important enough to talk to - it’s the part about “volatility.”
That basically means that OPEC are admitting they have no control over the market. Of course we knew that already, but for the organisation to be quite this open, is slightly worrying.
One of the things not often considered in the general run of the energy markets is the idea of the price of crude falling. This, by the way, does not preclude or deny “peak oil.” But there is a glut of oil ready to arrive onto the market over the next one to three years. As well as oil there is a ton of Liquid Natural Gas (LNG), a pile of natural gas and even sometime by 2010 some gas-to-liquid (GTL). And it has all cost a fortune to extract.
Another factor in potential volatility is the downstream. Here we see a series of new shiny refineries such as Total’s [NYSE:TOT] Gonfreville refinery in France that processes anything you can throw at it. It is now at full steam. All around the world and especially in the OPEC countries more and more refineries are being upgraded. That means so-called heavy or sour crudes are more readily useable and will lessen the dependence on expensive sweet crudes, nice though they are.
So we may have a nice comfortable moment coming in the energy supply chain. But it may also come at a time just when the economies of the world are slowing down, all centred around the normally uncertain economic times around a U.S. presidential election. So we could have a nasty little convergence of an oil market no one can control, over supplied with both raw crude and lovely shiny products, in the middle of a recession.
This is really going to hurt the oil companies who have spent a fortune at very high commodity prices building new capacity. Now, let this columnist be clear, it may well not happen. But it is not out of the question and as OPEC said today, it is no longer something they can control.
