Setting the record straight over prices

OPEC Bulletin Commentary January-February 2011

OPEC is committed to ensuring that an orderly oil market supports sound global growth, as the world recovers from the deep economic malaise of the past few years.

The latest studies from our Secretariat in Vienna provide insights into the recent spell of oil price volatility, as well as identifying areas of possible concern in the coming months.

After a relatively high degree of price stability in the first ten months of last year, with crude settling at levels which won wide acceptance among producers and consumers, there was a clear shift of trend in early November. This saw the price of our Reference Basket surge past  $80/barrel, slip back a bit and then rise strongly to the high 80s' at the start of December. By the final week of that month, it had topped $90/b and then climbed past $94/b in the second week of the New Year.

Some observers were quick to seek parallels with 2008 - when the Basket price on the first day of trading that year was only $2/b above the $89.81/b of January 3, 2011 - and express concern about a repeat of the troubling events of that year. An often-asked question is whether prices will persist at these higher levels or whether this is only a temporary phenomenon and there will be a suitable correction over the coming weeks.

Let us now address the underlying issues.

A key factor in the price surge has been the early onset of winter weather. This led to stronger heating oil demand, as well as a decline in crude oil stocks above the seasonal average. Some forecasts calling for a revival in crude oil demand and a perceived potential for market tightness over 2011 have also played a part. Additionally, bullish market sentiment and a surge in investment flows into major commodity markets, including crude, have pushed prices higher; this general increase in commodity prices has been due to expectations of a continued improvement in the global economy.

Turning to stocks, these point to a continued well-supplied global market. Despite a stronger-than-usual seasonal crude draw, US crude inventories remain comfortably above the five-year average; product stocks also show a surplus over the seasonal average. At the end of the year, other OECD regions, such as Europe and Japan, even experienced counter-seasonal builds. Some extra barrels also remained available in floating storage.

Encouragingly, in the event of a strong rise in demand or a sudden supply disruption, OPEC holds around 6 million barrels/day of spare capacity which could quickly be made available to the market. Indeed, expected demand for OPEC crude in the first half of the year will be slightly lower than its current output, which would result in a growing stock cushion.

All in all, with the overall economic situation becoming brighter over the past year, the expectations of a sustained improvement, particularly in such emerging economies as China and India, will continue to influence oil market direction.

Nevertheless, important risks remain which could affect crude oil prices over the coming months. These include: rising sovereign debt concerns in some OECD countries; weaker-than-expected oil demand growth; excess crude and product inventories, both onshore and offshore; and higher spare capacity in both the upstream and downstream sectors. We must be attentive to all these possibilities.

Quite clearly, however, while there are some significant uncertainties around, the overall picture is a positive one. And the position will become clearer with the end of the winter season, as the market heads into the lower-demand second quarter. Until then, there is an adequate cushion of supply in both inventories and spare capacity to meet the market's needs.

And so, as OPEC Secretary General, Abdalla Salem El-Badri, said on our website on January 18: "Any assumption that there is tightness in the market … is incorrect." And he was emphatic in adding: "Supplying the world's media with unrealistic assumptions and forecasts will serve only to confuse matters and create unnecessary fear in the markets. Ultimately, this is adding to volatility in the oil market and destroying the stability that OPEC works so hard to support" (see story on page 4).

OPEC Bulletin Jan-Feb 2011

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