July 01, 2007	Sunday	Jamadi-us-Sani 15, 1428

RIYADH, June 30: While the US crude inventories are currently at their highest level in a decade, interestingly, defying all logic between Q107 and Q207; market prices have strengthened by almost $10 a barrel, sending conflicting signals.

Quarter by quarter, this is the biggest price increase this decade, says the just released Monthly Oil Report (MOR) of the London-based Centre for Global Energy Studies (CGES).

“This dramatic rise in oil prices would seem to suggest that the world is short of oil and ought to be providing a clear signal to Opec that its members need to put more oil into the market. However, the Organisation sees evidence elsewhere to support its argument that putting more crude into the market would not help to ease the situation,” the MOR felt.

The Paris-based International Energy Agency (IEA) has also been arguing for some time now that Opec’s rigidity (in not increasing its crude output) could bleed crude markets.

The IEA has also been underlining the unexpectedly strong demand in big emerging economies, a sharp supply fall in May and another crimping of supply this month because of routine maintenance on infrastructure outside the Opec, as the likely sources for continued Bull Run.

The agency, in fact raised its forecast for daily demand growth to 1.7 million barrels a day or 420,000 barrels more than it estimated a month ago.

“It seems difficult to escape the conclusion that the oil market will be tight in the second half,” the agency said in its monthly oil market report, lifting its forecast for global oil demand to 86.1 million barrels a day.

European Energy Commissioner Andris Piebalgs also called on the Opec during a meeting in Vienna to steer away from output restrictions.

“We are saying: Don't make any restriction and open your production according to how each company and each country feels the market should be supplied.”

The Opec is however, looking at the market through a significantly different prism. “As we see it now there is no shortage,” Opec Secretary-General Abdullah Al Badri emphasised. “There is a lot of oil on the market, the stocks are high.”

Most Opec members also feel the same way and underline they are more than meeting the global crude demand and the reining in of its production has not drained stocks at major customers. Figures indeed second this Opec claim.

The Opec is basing its projection on the highest US crude oil inventory levels for almost a decade and the relatively low rates of US refinery utilisation, despite high refining margins. The Organisation cites geopolitical tensions in the Middle East and Nigeria, much beyond its control, as sources of upward pressure on oil prices.

The Opec also expects global oil demand to increase by 1.3 million bpd (1.5 per cent) this year. However, Opec maintain optimism about non-Opec oil production and is taking a cautious approach about the call on its own output. Opec sees non-Opec output increasing by 1.14 million bpd in 2007.

The net result is that Opec’s estimate of average non-Opec production in 2007 is 750,000 bpd higher than the estimates made by the IEA and the CGES.

On this account, the IEA, remains concerned that crude markets will tighten significantly in the second half of 2007 as global demand rebounds from its second-quarter low point. It argues unless more oil is forthcoming from Opec, markets would tighten further.

Like the Opec, the IEA also sees the pace of global oil demand growth increasing dramatically in the second half of 2007. However, like CGES, the IEA is also less optimistic about non-Opec output growth. Despite conceding a year-on-year increase of 860,000 bpd in non-Opec production, the average production level is still 360,000 bpd below Opec’s forecast.

The gap in positions within the important trio stays — igniting fierce debate — making it still more difficult for the market to correctly define future movements. An ominous position to be indeed!