AMSTERDAM (
ResourceInvestor.com) -- According to officials from OPEC members Qatar, Kuwait, Iran and Venezuela, the main reason is to counter the ongoing decline of the global oil price. It’s premised on the assessment that there is too much crude oil in the market. However, evaluations of mainstream oil consultancies are showing that no real demand deficit exists at present. British and Dutch oil analysts are stating that OPEC's move is just a move to increase current price levels. Some OPEC officials have indicated that an oil price between $70 and $90 per barrel is the target. Officially, OPEC denies the assertion.
The continuing global credit crisis--increasingly affecting the European economies in recent lweeks—has resulted in a decline of the oil price. After hitting a record $147 per barrel, price levels are now hovering around $70. Economists expect that recession will be hitting the OECD countries the coming months, likely resulting a lower overall demand for crude oil. However this situation is not clear, as global oil demand growth is not linked intrinsically to the growth of OECD economies any more. Rather it’s largely tied to the growth of emerging countries, such as China, India and even the Middle East. Taking into account that China's economic growth still is said to be around 8% the next year, additional demand for crude oil from emerging markets is still expected. Simultaneously, as long as African and Asian markets continue very high subsidy levels on their energy products—buffering their domestic consumers, demand seems not to be very affected by any real change in economic growth.
The October 24 OPEC meeting, moved up from the planned meeting on November 18, is also not expected to see dramatic moves. Analysts are warning that if OPEC decided to take out around 1 million barrels per day out of the market, this still needs to be assessed. In recent years, OPEC has been moving very politically correctly. The oil cartel has been always addressing requests of oil consumer countries, such as the U.S. or E.U., by cutting or increasing their quotas as asked for. However, in reality, their respective moves were always unclear. It still remains to be seen if a change in quota, especially of around 1 million bpd, will materialise in the market. Taking into account their former production changes, analysts doubt if it will be real barrels that are taken out of the market. In reality, a 1 million barrel per day change in quota could mean that OPEC just will change its quota based on current production figures.
Nigeria, one of OPEC’s largest producers, should officially be producing around 1.8-2 million barrels per day. Last month, Nigeria was officially producing 1.85 million barrels per day. However, Nigerian officials have stated in the press last week that the real production of the country is less than 1.25 million barrels per day, due to increased shut downs in the Niger Delta and other production constraints. Angola, a new member to OPEC, some months ago even the largest African OPEC oil producer, has stated to the press that it production has fallen by around 300,000 barrels per day lately. Other OPEC countries, such as Iraq, Iran and even Venezuela, also have reported already lower production. Taking these factors into account, 1 million barrels per day reduction of OPEC production could in reality be a move to reduce the cartel's export potential to a level, in reality, already in the market. This situation will not result in a growing shortage in supply, as it should be seen as a cosmetic move to reduce volatility.
The current volatility in the market is not expected to be reduced substantially. Fears exists that demand for petrol and kerosene will even be lower the coming months. Demand reduction in the West will have an effect, but this could still be countered by increased demand in emerging markets. A slowdown of the global economy is of course detrimental to demand, but its overall effect is still unclear. Bloomberg reported that U.S. demand for fuel is already at the same level as it was in 1999. Price volatility is still a fact for the future. Demand is under pressure, but simultaneously production is also feeling the heat. Lower prices for crude oil and petroleum products will result in future investments to be put on hold. As reported before, oil producing countries and operators need high price levels to be able to invest in new production facilities and refining expansion. If these revenues are not available, the cash flow of operators will be drying up, resulting in lower production in the future. In the end, short term moves such as production reduction only will result in a mid- to long-term situation that oil prices will again fligh through the roof. Lower future production, due to lower investment volumes and ongoing production decline of existing fields, will be the real threat to be discussed.
Consumers at present are happy; their petrol bills at the pump have gone substantially down. This could be however only a short term gain, as a re-emerging economic growth worldwide will again be confronted by production shortages. Maybe it is better to reduce the current gains, get used to higher price levels and have enough oil production capacity for years to come. An additional gain of higher crude oil prices is the fact that alternative energy sources are being considered. Peak oil is still not a real fact of life, but on the long term, a decline of oil production will be. To counter a shutdown of the global economy at that time, new sources of energy need to be found. Without investments in all sectors, this will not be able to be done.
