When one quota doesn’t do the job, maybe another one will.
Therein lies Opec’s rapidly evolving strategy when it comes to its ongoing struggle to convince oil traders that the cartel’s in charge of crude’s price destiny. Kuwait’s oil minister and Opec’s president, Sheikh Ahmad al-Fahad al-Sabah, detailed the new-new philosophy on Thursday, explaining, “We believe that if prices stay as they are in the next seven to 10 days, we will start contacting minister colleagues to discuss the other 500,000 (barrels a day) that the president has the authority (to decide on) after consultations,” reports AP via ABC News. Hey, at this rate, maybe they’ll be a new meeting about having a meeting about talking about even future potential production hikes…maybe.
But talk (and talk of talk) continues to decline in value, suggests a fellow Kuwaiti who happens to be an oil analyst. “Opec is no longer the same influential power that controls oil prices as it did in the past,” Kamel al-Harami told AFP, reports Channel NewsAsia. “Today, they have a small output capacity and they cannot control increase in demand.”
Or so the theory goes. Opec, for the moment, says otherwise. Whether they can do otherwise keeps the world economy on pins and needles.
Meanwhile, it was no accident that Opec’s public rethinking of its Wednesday announcement of a production hike, which was greeted early today with another sharp jump in oil prices in New York to yet another new high. At one point on Thursday, the near-term futures contract on oil threatened the $58-a-barrel range before pulling back under $57 by the close.
The situation is precarious in the short run if only because the world economy remains increasingly dependent on the likes of Nigeria, Iraq, Venezuela, Russia and Iran for crude. Stability and political calm don’t necessarily come to mind when such names pass one’s lips. That’s old news, of course, but the dependence on those countries takes on a new twist as the world’s spare oil production capacity recedes to nail-biting levels. Opec’s spare capacity, most of which resides in Saudi Arabia, has dropped to an optimistic estimate of 1.6 million barrels a day, according to the Energy Information Administration. That’s cutting it close, considering that global oil consumption was recently running at 83 million barrels a day, by one estimate. That puts Opec’s spare capacity at under 2%.
There are two threats that make 2% something to worry about. As always, it comes down to demand and supply. Demand is rising rapidly, courtesy of China, India and other emerging markets. Supply, meanwhile, isn’t keeping pace, or so we’re told. But the more immediate concern is that Iran, Iraq, and so on may be vulnerable to a variety of unnatural and ultimately self-inflicted export disruptions.
But all’s not lost, at least in the matter of hope. There are still some who take an optimistic view of the markets. Neil McMahon, oil analyst with Sanford Bernstein & Co., writes today in a letter to client, “With crude reaching new record highs, it is clear that pricing levels continue to discount the fact that the market is currently well supplied as evidenced by rising inventory levels.” Accordingly, he predicts a correction looming that will bring crude back to the $40 to $50 range.
Meanwhile, it’s not clear how much more “discounting” the global economy can take, although we may soon find out. In any case, there’s more than one way to spin crude inventories. James Williams of energy consultancy WTRG Economics writes in a missive to clients today that U.S. crude oil stocks are in the upper half of the normal range. “However, when the additional demand over the last five years is factored in total crude oil and petroleum inventories remain near historic lows.” Williams goes on to observe,

For the last two years the number of days of inventory has averaged 46.3 days compared to the current 45.3 days. The last two years have had the lowest sustained level of days coverage in over 25 years.
Not surprisingly this two-year period coincided with a sustained increase in petroleum prices.

Williams is wrong about one thing: some of us (you know who you are) were surprised.