While analysts debate the dilemma OPEC faces at its meeting this week in Abu Dhabi -- whether to increase product to address high prices, or to hold the line due to oil's recent dip -- traders have their own take on what the cartel could do. "If they're uncomfortable with a 500,000 barrel cut all at once, they could do it in stages: 250K and 250K," Jim Dietz, independent oil trader, told BloggingStocks Monday.
Complicated task
Nearly everyone in the market understands that OPEC's task is complex and made more-arduous by uncertainties facing the oil production environment. Oil prices danced with $100 per barrel about two weeks ago, but fears of slowing economic growth have since pushed them down by more than 10%. Oil futures continued their downward move Monday, falling 77 cents to $87.94 per barrel, continuing their biggest weekly decline in two years. Heating oil dropped about 2 cents to $2.49. Unleaded gasoline declined about 1 cent to $2.22.
Once again, Ali Al-Naimi, Saudi Arabia's oil minister, repeated his contention that it was primarily investors -- not the supply of oil -- that have artificially inflated oil's price.
"There is absolutely ample supply," Ali al-Naimi, Saudi Arabia's oil minister, said at an energy conference in Singapore, The New York Times reported. "The price movement has nothing to do with the fundamentals of the market."
Dietz said OPEC, which accounts for about 40% of global oil production, should seriously consider taking a half-step -- a moderate approach -- if the cartel is concerned about the markets becoming oversupplied with oil.
"Given oil's remarkable run up, it's hard to conceive of a market that's over supplied, but if the best case scenario ensues, that could be the case," Dietz said. "But that doesn't necessarily mean the price of oil collapses."
Political concerns
According to Dietz, the market remains concerned about the Iraq War, Iran, Venezuelan and Nigerian political/social unrest, as well as the possibility of a colder-than-normal winter in the United States, causing a large use of oil. However, if all of the above conditions turn favorable for production, Dietz said the market would then be adequately-supplied with oil, leading to what OPEC fears: further price declines. It would be, however, a drop of another $2-5 per barrel, not a price collapse, as some assert may happen.
"There dilemma is real, but not as big as [Saudi Arabia oil minister] al-Naimi says it is, so what they could do is added 250,000 barrels per day this week, then wait and see how the market responds," Dietz said. "If the price flattens and rises, they could add another 250K later, if it continues to fall cut the original 250K of production."
Analysts also point to slowly-increasing production in non-OPEC zones such as Russia and Norway, with these sources expected to add about 1.1 million barrels per day by mid-2008. OPEC produces about 30.6 million barrels per day, with a spare capacity of about 2.5 million barrels per day, mostly in Saudi Arabia.
Still, while noting the complex nature of the oil market and the cross-pressures facing OPEC, Dietz still said the right move, at this juncture, would be some increase in production.
"We still have a global economy growing at near 5% and ramping China oil demand, even if the U.S. economy slows," Dietz said. "Until I see signs that the global economy is slowing, it's hard to see oil prices dropping for any sustained period of time."
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Reader Comments (Page 1 of 1)
12-03-2007 @ 12:55PM
Peter Cave said...
My oppinion is that the market place and politics will determine the price of oil products.
For example, I remember that a week after the present administration took office oil prices climbed and never stoped climbing.
Consuption of oil energy related products will never go down because the population will never slow, therefore consuption will increase unless governments and the oil companies start to to legislate and invest in alternate, cheaper energy sources.
If I were a Arab chief of State, I would begin to consider investing monies made on oil in ethanol, nuclear power, wind etc. After all their oil reserves will not last forever and when they are gone in the not to distant future their people will be left with nothing.
This does not even begin to address the problems and costs associated by the ever increasing amounts of toxic gases immited by burning petro chemicals.