Anticipating market needs despite uncertainties - Sep 07

Source: OPEC_RP070912 9/14/2007, Location: Europe

Since the end of July, crude oil prices have experienced sharp volatility, with the OPEC Reference Basket falling more than $7/b through most of August before experiencing an even sharper rebounding to a record-high $74.64/b on 13 September. The main factors triggering the recent increase in prices were US commercial stock draws, storm fears in the Gulf of Mexico and related shutdowns in US refineries as well as geopolitical concerns, most recently a series of attacks on oil and gas pipelines in Mexico. This is despite the recent decision to increase the OPEC production ceiling to 27.3 mb/d, the end of the US summer driving season and the general downward trend in revisions to world oil demand projections for the fourth quarter of 2007 and in 2008. Similarly, developments in the physical market do not appear to support current price levels, as in both the US and Europe physical barrels are trading at discounted levels to the benchmark, indicating sufficient supplies are available.

The high volatility reflects the considerable uncertainties about market fundamentals. On the supply side, uncertainties concerning the impact of ongoing projects delays, higher service costs and the trend of heavier field shut-downs had resulted in substantial downward revisions to the initial forecasts for non-OPEC supply, without reducing the range of uncertainty.

The uncertainty is also large on the demand side. Potential weather-related developments could affect the petroleum complex in either direction. Additionally, downside risks to world economic growth have risen considerably. The main concern is that financial instability could negatively affect the real economy in the US and globally, with a subsequent impact on oil demand. However, it is still too early to gauge the full impact of recent developments, as events are still unfolding. The large uncertainties surrounding both non-OPEC supply and world oil demand result in even larger uncertainties on the demand for OPEC crude.

Stock movements also reveal a mixed picture. The most recent data (end July) show total OECD commercial oil stocks are 68 mb above the five-year average. In terms of days of forward cover — which takes into account demand expectations — this corresponds to a healthy level of 54.4 days. However, a look at US inventory data shows a less positive picture, as crude oil stocks have exhibited a clear downward trend, falling 31 mb in recent weeks. This downward trend can be attributed mainly to a decline in US crude imports in August as well as the market’s shift into backwardation which removes the incentive to hold inventories. Despite these declines, the latest data (week ending 7 September) shows US crude oil inventories are still more than 25 mb over the five-year average. Moreover, the relatively heavy refinery maintenance schedule in the US and Europe in the coming months could help ease the pressure on crude inventories, although possibly aggravating the ongoing tightness in the US product market.

Despite this environment of uncertainties, OPEC decided at the recent Meeting of the Conference to increase production by 0.5 mb/d on top of August levels to 27.3 mb/d, effective 1 November. The increase is a clear demonstration of the Organization’s concern about the continued health of the world economy as well as its ongoing commitment to ensure adequate supplies, especially ahead of the high-demand winter season. The Conference will meet again in December to reassess the market situation. Until then, it expressed its readiness to respond swiftly to any developments which might undermine oil market stability.


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