Opec bets on recovery to boost price
By Javier Blas in Vienna
Published: May 28 2009
The Organisation of the Petroleum Exporting Countries delivered on Thursday its most optimistic message about the global economy and the oil market since the start of the financial crisis last summer triggered a precipitous fall in prices from a record $150 a barrel to $30.
“We are beginning to see light at the end of the tunnel,” Abdalla El-Badri, Opec secretary-general, said after the cartel agreed to leave its production level unchanged, betting that the global recovery would push oil prices to $75-$80 a barrel.
“We are seeing [oil demand in] the US picking up,” Mr El-Badri added. “But, above all, which is the most important, we are seeing demand in China and India and Asia as a whole.”
Because oil demand was closely correlated with economic activity, Opec’s cheerful view was a signal the global economy was slowly strengthening, analysts said.
Ali Naimi, Saudi minister and one of the world’s most senior energy policymakers, added to the upbeat sentiment, saying: “The price is good, the market is in good shape and the recovery is under way, so what else could we want?”
Oil prices rose immediately to a fresh six-month high of more than $64 a barrel.
David Kirsch, an oil market analyst at PFC Energy, said in Vienna that Opec was leaving behind its worries about the global economy, last expressed at its March meeting. “Opec is witnessing early signs of economic recovery and financial flows into commodities,” Mr Kirsch said.
Opec delegates said that Saudi Arabia appeared confident that the flow of money into commodities – as investors worried about a pick-up in inflation or a further weakening of the US dollar – would help the cartel to support oil prices. Speculative flows, long an Opec foe, could turn into an ally, analysts said.
Nonetheless, behind the scenes some Opec members such as Venezuela and Algeria expressed their unease about the precarious balance between supply and demand, and high inventories.
The International Energy Agency, the western countries’ oil watchdog, forecast that global oil demand would drop this year by 2.6m barrels a day, the steepest fall since 1981.
In addition, crude oil inventories in developed countries both onshore and floating in tankers are near record levels. Those concerns echo the scepticism of many traders in the physical market about Riyadh’s view of rising oil demand. Few analysts on Wall Street share Saudi Arabia’s forecast that oil prices would rise to $75-$80 a barrel by the end of the year.
Opec’s communiqué reflected the nervousness of some of its more bearish members, saying that the cartel was ready to “respond swiftly to any developments which might place oil market stability and their interest in jeopardy”.
At the same time, the oil cartel’s ministers “reiterated the firm commitment to the individually agreed production allocations”, a sign that the group is concerned about some member states pumping above the officially sanctioned levels.
The group has announced three big output cuts since September, totalling a record 4.2m barrels a day – about 5 per cent of global oil demand – but it delivered about 80 per cent of the promised reduction last month, down from 85 per cent in March.
The official output ceiling of Opec’s core members, excluding Iraq, stands at 24.8m b/d. Opec will review the oil market in a meeting scheduled for September 9.
Data from the US Energy Information Administration showed that crude oil stockpiles fell more than expected as refinery utilisation jumped. Crude stockpiles fell by 5.4m barrels, compared with the expectation for a drop of 700,000 barrels.