RIYADH, Oct 28: Oil prices have staged some recovery, currently flirting around the $60 barrel mark from the lows of $57, yet the clash of interests within the Opec and its past performance, in not keeping up to its stated resolves, is weighing heavily on the crude markets.

Despite the cartel’s announcement of 1.2 million barrels a day cut in its output from November 1, weak fundamentals and scepticism in the market on Opec’s ability rather its resolve to implement its decisions continue to plague the crude markets--notwithstanding the recent developments and announcements in this regard by Saudi Arabia, Kuwait, the UAE and even Iran to cut their output in accordance of the deal. Venezuela and Nigeria had announced cutting their output even before the Doha moot. The scepticism still remains.

The fact however, remains it might take at least four weeks for any output cut to have its impact on market. And all the crude on seas shipped before the output cut announcement, would still be filling the tanks of the consuming nations for a few more weeks.

Oil markets have undergone a sea change over these weeks pointing to a significant weakening of market fundamentals. The continued Opec output at almost seams for months has apparently played havoc with market sentiments--indeed in sharp contrast to what it was a few weeks earlier. This is how the crude markets behave--irrationally and unprovoked.

After months of producing almost at seams, it was becoming increasingly evident in the recent weeks that Opec will have to change its course. The only variable was when? The moment seems to have finally arrived.

In recent years, oil prices have continued to rise despite increasing inventory cover, but lately it was getting apparent that the covering was reaching a point that was dragging the crude market prices down. Global stock cover had in the meantime risen from 70 days’ worth of forward consumption in QI-05 to over 74 days in Q3-06--a level where the markets felt considerably at ease.

Higher market prices over the last few quarters were also now starting to impact the demand growth in the US and elsewhere in the world. Oil demand growth has been slowing up noticeably in the three quarters of the current year. Thus far the global crude consumption has been rising year on year at a rate of 0.8 per cent versus 1.7 per cent over the equivalent three quarters of last year.

Demand growth has in fact slowed sharply in all areas except China. Even sales of gasoline and diesel, for which there is no readily available substitute, have risen just by a mere 0.1 per cent this year in the developed world, while the consumption of naptha and burning fuels is down sharply as cheaper natural gas and coal appear making inroads into oil market’s share.

The incremental oil consumption in the key US market has also been languishing at a mere 120,000 bpd during the first nine months of 2006. In fact the International Energy Agency trimmed its 2007 global oil demand growth forecast by 90,000 barrels per day to 1.45 million bpd because of the weakening demand in the key US market. This change in the IEA’s monthly report follows a downward revision of 100,000 bpd last month too.

The US distillate output is also now being reported at new high and consequently the refiners are now cutting runs. Crude runs in Asia during July and August were 700,000 bpd higher than the same period last year and the US throughputs last month averaged 15.8 million barrels per day--a record for September.

The surge in refinery output far outstripped consumer demand and product stocks have built rapidly in all regions. A consequent 25 million barrel stock build-up last month took US inventories to an eight year high of 760 million bbls.

Some recent draw downs from the inventory in the US have though helped the markets get a bit firmer over the last few days, contributing to the current price hovering at around the $60 mark.

Major Asian destinations too have also been facing product surpluses as local demand failed to absorb higher refinery output over the summer resulting in slashing of crude runs in Japan and some other Asian markets.

In Europe and China, though the situation was somewhat different as they represented bright spots in the otherwise gloomy market conditions, one has to concede. However, counterbalancing strength, the Atlantic Basin crude demand was reportedly slackening again, threatening further price falls.

The other factor impinging heavily on the market was market’s scepticism towards the Opec decision to slash output. Despite the decision of Saudi Arabia and the UAE to trim their outputs, markets remained sceptic. Saudi Arabia told some of its major customers in Asia and the United States, on Monday, despite being the Eid day in the kingdom, that it was slashing shipments to them. Kuwait and Iran also followed the suit.

Then the UAE also followed with similar announcements. Abu Dhabi's state oil firm told major customers last Tuesday it would cut crude exports by about 5 per cent in November, indicating its compliance with the Opec decision.

However, traders felt the UAE may fail to meet its full 100,000 barrel per day (bpd) output curbs unless Abu Dhabi widens its restraints to include Upper and Lower Zakum crudes.

Abu Dhabi National Oil Company (Adnoc) told producers and lifters it would cut exports at its main Murban field and at smaller Umm Shaif, but it made no mention of Upper and Lower Zakum, which account for nearly a third of its output. This has added to the confusion and hence scepticism in the market.

Keeping in view Opec’s past history, there were reasons for that scepticism. Analysts in Dhahran, the virtual global energy capital, strongly feel it would stay so, unless Opec could prove otherwise and that all its members were ready to shoulder the burden.

Markets needed evidence of Opec’s seriousness. And concrete evidence from all the Opec players was still awaited.

The Monthly Oil report of the London-based Centre for Global Energy Studies (CGES), released on 23rd of the month, says, “Had Opec continued merrily to produce at current levels until the end of June 2007 an average Opec basket price below $50/bbl could easily have been on the cards for Q1-07 and a price under $40/bbl would have been quite possible for Q2-07.”

The writing was very much on the wall! And thus the flurry in Doha, Riyadh and elsewhere in the oil capitals of the world, was very much understandable.

The ride ahead could still be bumpy, one cannot write off, yet if the Opec could stick to its guns, things would indeed be different. The current market gloom would then be gone--every one here in Dhahran concedes and admits.