RIYADH, Oct 1: Enough crude is currently available in the markets and there are not many takers for additional supplies yet the turmoil in the global crude market continues — almost unabated. An interesting, somewhat odd and intriguing development indeed for the oil markets to grapple with today.
As the Opec oil ministers sat down in Vienna and decided to raise crude output further, a number of factors were already weighing in on them. Crude markets have been in turmoil for some time now and despite a number of steps by the oil producers’ not much seemed to have tamed the rising prices.
In the meantime, constant pressure also has been building up on oil producers ‘to do’ -– something, to cool down the markets. British Chancellor has been in the forefront of the drive to put pressure on Opec. He told the BBC, a few days before the Vienna moot, that Opec had failed to respond to quickly enough to the surging demand for oil from China. He urged the Opec to increase supplies and relieve pressure on prices.
Others too were putting pressure on the oil cartel. The EU finance ministers in a statement urged the Opec to produce more. The International Energy Agency also seemed to be clamouring for more oil on the markets.
But are there takers for the additional crude in the markets? All these clamours for more oil seemed hollow when looked from the market perspective.
There are indeed not many takers in the market for additional oil. In fact according to market watchers, of the 30 million barrels of crude released from the US Strategic Petroleum Reserves in the aftermath of the Katrina crisis, only 11 million barrels were sold. There were 19 million barrels that no one wanted. Even the OECD energy watchdog, the IEA which offered to release 60 million barrels of oil from their strategic reserves announced later it would neither extend the release period, nor increase the volume of releases, underlining lack of appetite in the global crude markets.
And that is what oil producers and especially its kingpin Saudi Arabia has been emphasising all these months – and – years. The current rise in oil prices does not stem from a shortage in crude oil supplies but is due to, as everyone knows, is emanating from demand side, Crown Prince Sultan reiterated before a selected New York audience.
The London based Centre for Global Energy Studies, in its September Monthly Oil Report released only on the day the Opec ministers’ met in Vienna clearly emphasized, “There is no obvious supply–side route out of the present period of high oil prices. It seems change can only come through a collapse in demand growth, which would ease some of the capacity constraints.”
It seems oil prices are no more responding to the level of crude oil inventories as they have in the past. Despite the fact that slowed dramatically since 2Q04, it continues to outstrip the pace of non-Opec supply growth and Opec capacity additions as well as global increases in refining capacity, the CGES report underlined.
The refining capacity is also not expected to rise dramatically over the next few months. It almost takes five years to build a refinery and the markets have to bear with the lag period, even if some projects go on board immediately. However, there are now signals that large oil consumers, hit by rising fuel costs are starting now to talk of entering the refining business. That is a good omen fore the market in the medium to longer run.
