Abraham Energy Report

Buoyed by steady prices and stable inventories, the Conference of OPEC Ministers at its Sept. 9-10 meeting agreed to maintain current oil output levels. OPEC’s action confirmed our predictions (See: “OPEC Watch: Fall Meeting Preview,” Abraham Energy Report, Vol. 1, Issue 7) and those of many market analysts going into the 154th (Ordinary) Meeting in Vienna.

Comments by Ministers leading up to the meeting all pointed to keeping the status quo, given that the improving economic outlook and relative stability in the market has kept oil prices close to $70 per barrel.  This is a price OPEC views as being satisfactory, in that it is good for both producers and consumers alike.

The formal OPEC Ministers meeting was not scheduled to start until 9:30 p.m. local time in Vienna, which lent credence to expectations that the outcome of the meeting was a foregone conclusion, and the Ministers wouldn’t need much time to reach agreement.

In his opening address, HE Eng. José Maria Botelho de Vasconcelos, Minister of Petroleum for Angola and President of the Conference, noted that since its last meeting in May, there had been a general improvement in prices, which was providing welcome support for the industry’s investment plans.  He also expressed his ongoing concerns about high inventory levels, continuing price volatility (linked to exchange-rate fluctuations and other financial market signals), and the role of high levels of speculation in the market.  He noted that the economic outlook has improved to some extent, but that there is still great uncertainty about the timing, strength, and pace of the global economic recovery.  He concluded his remarks by saying that he was optimistic that the “darkest days of financial turmoil and economic recession are behind us.”

The official press release issued after the meeting echoed these themes.  The operative paragraphs from the release are:

“The Conference reviewed current oil market conditions and future prospects and observed that, whilst there are signs that the economic recovery is underway, there remains great concern about the magnitude and pace of this recovery, especially in the major industrialized nations of the OECD.  There has been some easing in the overhang of crude oil stocks but market fundamentals remain weak, refinery utilization rates are low and product inventories have risen considerably.”

“Accordingly, since the market remains over-supplied and given the downside risks associated with the extreme fragile recovery, the Conference once again agreed to leave current production levels unchanged for the time being.  In doing so, the Conference reiterated its determination to ensure sound supply fundamentals and an adequate level of spare capacity for the benefit of the world at large.  Similarly, the Conference recorded the readiness of Member Countries to rapidly respond to any developments which might jeopardize oil market stability and their interests.  Therefore, in addition to maintaining constant watch over supply/demand fundamentals, the Conference agreed to reassess the market situation at its 155th (Extraordinary) Meeting, to be held in Luanda, Angola on 22 December 2009.”

In other news, this was the last meeting OPEC will have in its current building, which has housed the organization for 30 years.  At the end of November, the organization will move to new quarters in Vienna’s First District.  In 2010, OPEC marks its 50th anniversary.  OPEC congratulated Germanico Pinto on his appointment as Minister of Mines and Petroleum of Ecuador, replacing former Minister Placios Guerrero.  They also welcomed Masoud Mir-Kazemi, who is Minister of Petroleum of Iran and replaces former Minister Gholamhossein Nozari.  Libya’s Minister of Petroleum and former Prime Minister, Shokri Ghanem, did not attend the meeting, and Libya was represented by Ali E M Saleh, the General Manager of the Libyan National Oil Company.  Ghanem has been involved in some recent policy disputes in Libya, and has indicated that he wanted to retire. Many believe that his resignation has now been accepted.

Interviews with a number of Ministers after the meeting indicated that there was still some concern about excess supply and high inventories, but that the Ministers were unanimous in their decision to continue to take a wait-and-see approach.  The improving global economy and potential for a recovery in demand in the fourth quarter of this year was enough to convince Ministers that their policy will gradually work if there is continued compliance.

Saudi Minister Ali Al-Naimi reportedly said that there was no need for any action right now, noting that the price was “perfect.”  Al-Naimi also told reporters that he was in favor of additional oil-market regulation to curb speculation and reduce price volatility.  This reflects the widespread recognition by Saudi Arabia and most other OPEC Members that extreme oil price volatility provides consumers with a strong incentive to seek out alternatives to oil, possibly undermining long-term demand.

No new numbers about the outlook for oil supply and demand were available to the public or the press in advance of the meeting.  The September versions of the monthly round of short-term oil market forecasts published by OPEC, the International Energy Agency (IEA), and the U.S. Department of Energy’s Energy Information Administration (EIA), won’t be released until later this week or next week.  Nevertheless, as is standard practice, OPEC’s Market Monitoring Committee met prior to the formal Meeting of the Conference to review the latest market trends, and to preview OPEC’s next monthly report.

High and rising inventories of crude oil and petroleum products have been worrisome to OPEC, but recent figures from the U.S. suggest that the inventory overhang may finally be starting to shrink.  The American Petroleum Institute’s (API) weekly inventory numbers were released in the U.S. just after the start of the OPEC meeting.  The API release showed a significant drawdown in crude oil inventories which, along with continued weakness of the dollar, provided some immediate strength to oil prices in the aftermath of the meeting.  The EIA’s weekly inventory report, released a day later, confirmed this trend.

The prospect of stronger economic growth in the second half of this year is beginning to occur now, as the end of the summer peak driving season concludes.  How these two opposing factors work out is unclear at this point, and it will probably remain unclear for several weeks.  Statistically speaking, oil demand is measured as deliveries of product out of primary inventories. In the case of gasoline in the U.S., for example, when wholesalers shipped extra product to retailers in advance of Labor Day weekend, it showed up statistically as both a rise in demand (consumption) and as a decline in inventories.  However, since agencies don’t collect data on secondary inventories held by retailers, we don’t know how much of those extra shipments actually wound up in motorists’ gas tanks, and how much went into retailers’ (secondary) inventories.  It will take a few weeks to get a clear picture.

Everyone concentrates on U.S. data because the U.S. collects detailed statistical information on oil imports, sales, deliveries and inventories on a weekly basis.  Also, because the U.S. makes up almost 23 percent of the world market for oil, developments in the U.S. oil market are a good indicator of broader market trends.  Most analysts expect demand for oil in the second half of 2009 to be stronger than it was in the first half, and stronger than the second half of last year.  The good news is that the long-term drop in demand seems to be coming to an end, but the bad news is that no one knows how soon or fast an increase in demand is likely to occur.  Most expect the recovery to be slow.

Some analysts believe that oil demand is unlikely to grow fast enough to reverse the gradual rise in inventories we have seen this year.  The trend towards higher inventories, and ongoing maintenance of those higher levels, is getting a boost from gradually eroding OPEC compliance with its own production quotas, and by gains in production in Russia and elsewhere.  Recent OPEC production figures are above the organization’s production quotas, and above its own estimate of the demand for OPEC oil in 2010.

If demand fails to pick up or if OPEC’s compliance continues to erode, inventories could remain high or even continue to grow significantly.  There is already speculation about the possibility of and the need for an additional production cut by OPEC early next year or in the Spring of 2010.  For now, however, OPEC appears to be happy with its decision to stand pat.  Also, most OPEC members want to do their part to support global economic recovery, and a formal production cut anytime soon would clearly send the wrong message.

In recent day-to-day trading, oil prices (NYMEX WTI front month closing price) have been staying in a fairly narrow range of $67 to $73 per barrel.  Oil prices rose $3.08 to close at $71.10 per barrel on the day before the OPEC meeting, spurred on by weakness in the dollar.  Whenever the dollar weakens, traders buy commodities as a hedge.  The price of oil, which is denominated in dollars, tends to rise whenever the dollar falls, and to fall when the dollar strengthens.  The dollar fell to its lowest level of the year on the day before the current OPEC meeting, which explains much of the $3-per-barrel jump in oil prices we witnessed.  On Sept. 9, the day of the OPEC meeting, the dollar fell further to new lows, oil prices continued to rise, and gold went over $1,000 per ounce.

John Brodman
Sept. 10, 2009
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