RIYADH, Dec 25: Crude markets are in finally for some major adjustments. From almost $55 a barrel in mid-October, the prices have gone down to around $40 a barrel.

Just before the long Christmas and Boxing Day weekend, Brent North Sea crude for February closed down 61 cents to $40.10. New York's main contract, light sweet crude, for delivery in February shut on Thursday until Monday. It ended on Thursday down six cents at $44.18.

Despite the losses, concerns about low US crude stockpiles with winter firmly underway in the northern hemisphere still existed. Further, possible supply disruptions in Iraq, the Gulf and Nigeria were influencing the market sentiments.

Prices tumbled last Wednesday when the Department of Energy said US commercial crude oil inventories had unexpectedly climbed 2.1 million barrels to 295.9 million barrels in the week ending December 17. Distillates -- mostly heating fuel and diesel -- rose 600,000 barrels to 119.9 million, surprising analysts who had predicted a drop.

And while the markets are starting to get back to 'expected levels', the Opec decision to cut output by one million barrels per day (bpd) from January 1 effectively signals the demise of the Opec price band. The falling crude prices and the dwindling dollar value, it seems has convinced even the doves within Opec to shelve the $22-30 price band. The fall in the Opec basket prices combined with weaker dollar was too alarming a signal for the crude producers to ignore any further. The dollar in the meantime has softened by almost 30 per cent, significantly affecting the real cash that flows into the producers' kitty.

Although the Opec price band did not apparently come up for serious discussion in Cairo, yet it was now clear; Opec was not interested in defending the old band any further. The goal posts have moved, as some are saying now. The Opec target price has practically been revised upward. The next meeting could formally authorise that, analysts feel.

The impact of the Opec decision to curtail the output would be evident only in the weeks to come. The already lifted crude is very much in pipeline and may take another few weeks before its starts to show in the global inventory levels. Until, the markets seem to be awash with crude.

The decision to cut output was apparently hastened by the fall in Opec basket. The Cairo decision to curtail output, however, represented a middle road. On the one hand the group appeared concerned that the decline in the crude market prices could go a bit longer, while on the other it also wanted to appear behaving responsibly and not giving in to the temptation of having a significantly higher prices in the shorter run. They never wanted to be blamed for pushing crude prices again to the unprecedented levels the markets touched mid-October. Hence a middle route!

In reality, the decision would only result in scaling back the cartel's overall production to somewhat close to its output ceiling of 27 million barrels. In recent months, Opec member states, including Iraq, had been pumping more than 30 million barrels a day. Iraq's production on average hovered around two million bpd.

As per the OECD energy watchdog, the IEA, the Opec production in November stood at 29.4 million bpd, already down 500,000 bpd a day from October and signalling an end to six straight months of rising Opec production. Iraq for the time being is exempted from the Opec output quota arrangements, so as to enable it to rebuild its shattered economy and infrastructure.

In the meantime, the markets also appear to be testing the Opec resolve to cut output. Opec members are not very well known for respecting their output quotas and are often accused of flouting the output quota levels. The overproduction has been a perennial problem for Opec oil producers. This time around, over the past few months however, as the Opec crude producers were pushed by the market to produce at seams, crossing the official output levels was encouraged. However, this was more of an exception rather than norm. In normal circumstances, Opec expects its members to fulfil its obligations as members of the cartel, so as to ensure 'fair returns' for both the producers and consumers. The issue of what is meant by fair returns is though yet to be resolved.

For the time being at least, Opec members seem to be paying heed to the cue that markets are flooded with crude and any indiscipline on their part could play havoc with the market prices.

Saudi Arabia has already started to enforce the decision, by cutting its production by 500,000 barrels per day (bpd) - five months after these were increased. Oil minister Ali Al-Naimi reaffirmed that the Kingdom would start producing its usual 8.078 million barrels a day, as per its quota. Refiners in Japan and South Korea have in the meantime, confirmed that Saudi Aramco has informed them of chopping off the supplies by eight per cent in January. Saudi sales to global majors have also been reduced significantly in the meantime.

The decision to cut output with the advent of the 2005 appears all the more logical when also seen in the backdrop of the lowered IEA projections for crude consumption next year.

In its monthly market report, the IEA while maintaining the global oil demand for 2004 at 82.4 million bpd has, however, cut back its demand growth forecast for the next year by 80,000 bpd. The IEA now says that growth in the crude demand over the next year would now only grow by 1.4 million bpd. The IEA monthly report recorded the slowing down of the Chinese demand by 8.6 per cent in the third quarter of the year to 6.25 million bpd, after recording exponential growth of 19 and 25 per cent in the first and second quarters of the year. The growth in demand in China was projected by the IEA to remain at about eight per cent during the current quarter. China has been mentioned in the report as "the main wildcard".

Crude markets are entering a new and a very interesting phase and all eyes would be glued to its behaviour in the foreseeable future.

Opinion

Editorial

Population calamity
Updated 22 Jul, 2024

Population calamity

Pakistan can also control its growth rate by following the examples of its peers and implementing functional family planning programmes and campaigns.
Blow to occupation
22 Jul, 2024

Blow to occupation

THE International Court of Justice has delivered a legal blow to the decades-old Israeli occupation of Palestinian...
Seeking Priya Kumari
22 Jul, 2024

Seeking Priya Kumari

PRIYA Kumari — the minor girl who vanished on Ashura in 2021 while serving water at a sabeel in Sukkur district ...
Olympics contingent
21 Jul, 2024

Olympics contingent

FROM 10 in Tokyo the last time, it is now down to seven in Paris, and split across just three disciplines. When...
Grave concerns
21 Jul, 2024

Grave concerns

PUNJAB Chief Minister Maryam Nawaz’s open assault on the Supreme Court for ruling in favour of the PTI in the...
Civil unrest
Updated 21 Jul, 2024

Civil unrest

The government must start putting out fires instead of fanning more flames.