RIYADH, April 26: Opec has once again wriggled out of a tight corner. In the build up to the crisis in Iraq and its aftermath, the oil cartel and its kingpin, Saudi Arabia, have wronged a number of global oil and energy pundits on various accounts.
Despite doubts cast by some of the oil analysts, the Opec has managed a stabilising influence on the oil markets by maintaining the oil supply balance by pumping extra crude as per the requirements and the needs of the markets.
Before the advent of the crisis in Iraq, senior Opec members including the Saudi Oil Minister Ali Al-Naimi had vowed to keep the oil markets stable. They definitely proved that Saudi Arabia had the capacity and the will to meet the market requirements and balance the demand and supply in the global energy markets.
Some of the analysts had expressed concern that despite vowing to keep the markets well supplied, Saudi Arabia in particular and the Opec in general lacked the ability to meet the onus of such a responsibility. Times have proven that the Opec officials knew, better than others what they were committing. In order to meet the increased market requirements due to the crisis in Iraq and in the event of the persisting question marks about the Venezuelan and the Nigerian outputs, Saudi Arabia boosted its crude output from an average level of 7.85 million barrels per day in November 2002 to more than 9.5 million barrels a day by the end of March, an increase of 1.65 million barrels per day (21pc) in just four months. Other Opec members also added a further 1.2 million barrels a day (even after the loss of 0.8 million bpd of Nigeria’s output for half of March) to off set the loss of first Venezuela’s and then Iraq’s exports.
The Opec also succeeded in preventing a release of strategic stocks by oil consuming countries. In order to soothe the markets and not to provide any wrong signals to the energy markets, Saudi Arabia, the largest and the major oil producer within the Opec was determined not to let that happen.
This entire exercise has also made it clear that Opec still has the capacity and sufficient leverage and influence over the crude markets. Further, despite the talks of glut in the market before the April 24 Opec ministerial meeting in Vienna, it was clear that any decision to cut the raised output of the oil producing cartel would not be effective immediately. Saudi Arabia had indicated that it would maintain its full contractual volumes of crude oil, to both the US and its Asian customers in May. This practically meant that any cut in production could only be effective after May. And this is what the Opec decided in its Vienna moot. The 2 million barrels a day cut in the current Opec output levels, as announced after the Vienna ministers’ moot would only be effective from June 1 only.
It was in this light that Saudi Aramco’s shipping subsidiary Vela continued it’s chartering of Very Large Crude Carriers (VLCCs) for its own lifting in April.
Now with the tide turning on the other side, as fears of glut is taking over the markets and there have been talks of a collapse in the markets, Opec still appears to be effectively impacting the fundamentals of the energy markets.
Oil stocks in consuming countries, in the meantime, need to be rebuilt. On land stocks in the US and Europe ended the first quarter just 15 million bbl above the record low of March 1996. The higher level of demand means that forward cover is now even lower than it was seven years ago. The Venezuelan strike followed by a long, cold winter in the US has drained primary stocks, leaving them below the long-term average range.
US crude inventories remain now only just above the 270 million bbl minimum operating level. Refiners have used all the incremental oil to boost throughput ahead of spring driving season. Hence more imports would be needed to rebuild the crude stocks as well as sustain high refinery runs.
Further the long winter, which persisted even into April on the Atlantic coast, has left distillate stocks depleted on both sides of the Atlantic. The requirement to make as much heating oil as possible has had a knock-on effect on US gasoline stocks which normally build throughout the first quarters when demand is at a seasonal low.
In the meantime, the Asian stocks have also been run down over the winter, and eastern refiners, have been buying heavily until recently. Spot chartering data shows a steady rise in eastbound fixtures from the Gulf during March and early April and west African crude, which has been drawn west by the high WTI prices this year, is now starting to move to Asia again.
In the light of the above, the prestigious London-based Centre for Global Energy Studies founded by the former Saudi oil minister Sheikh Zaki Yamani, in its Monthly Oil Report forecasts: “The immediate reduction in output required to balance the market in 2003 is not huge. If Iraq’s oil exports remain off the market for most, if not all, of the second quarter, the CGES believes a cut of around 0.5 million barrels a day by the other members of the Opec would be sufficient to keep prices within Opec’s target range until the middle of the year. Thereafter, a more substantial target cut of a further 2 million bpd would be required from the Opec-10 to make way for the growing volumes from Iraq (its eleventh member) in the second half of 2003.”
Thus the Opec decision in its Vienna meeting on April 24 to cut output by 2 million bpd from June 1, despite confounding some of the energy analysts appears to be in line with the market fundamentals.
Those who had written off Opec, as an effective cartel with little influence on the global oil markets, seem to have been wronged once again.
