OPEC's quest for stability, come rain or shine

OPEC Bulletin Commentary May 2011

Few people will predict Vienna’s weather accurately on June 8.

Searing heat? Seasonal warmth? Chilly breeze? Who knows? We must wait and see.

But, whatever the weather, the Ministers will arrive on that day and OPEC’s 159th Conference will begin.

And what about the state of the oil market on June 8? Well, with the high level of volatility experienced since the Conference last met on December 11, one would probably have about as much chance of accurately predicting the weather on June 8 as of accurately predicting the oil price! That is from the perspective of late May.  

The high levels of volatility witnessed over the past six months have underlined once again the vulnerability of the market to influences far removed from supply and demand fundamentals.

There is no disputing the fact that, throughout this period, the market has remained well-supplied with oil. As the latest issue of our Monthly Oil Market Report puts it: “Ample spare capacity, adequate stock levels and lower demand for OPEC crude during the first half of the year are factors that should be sufficient to support market stability.”

And yet, we have seen what has happened to oil prices during this same period.

On December 10, the day before our last meeting, the price of OPEC’s Reference Basket was $87.65 a barrel. However, persistent upward pressure after that, with often volatile daily movements, saw it top $120/b on four occasions in April, before plunging by $8.40/b early in May, the second-biggest daily decline ever. At the same time, in the futures market, both WTI and Brent experienced the sharpest weekly decline on record, of almost $17/b.

To put all this into perspective, one must contrast it with the relatively high price stability that had prevailed for the first ten months of 2010, with crude prices settling at levels that had won wide acceptance among producers and consumers.

The monthly report adds: “The recent unwarranted volatility, however, highlights the destabilizing impact of excessive speculative activities.” How true this is, during a period that saw speculative activity on the Nymex reach record highs, with open interest for WTI by mid-March exceeding 1.5 million futures contracts, which was 18 times the volume of daily traded physical crude!

Alas, we are looking at a familiar story, as far as the recent history of the oil market is concerned.

Fundamentals versus speculation. Which is the true master of the oil price these days?

The mechanisms are perhaps too complex to provide a definitive answer. Anyway, the respective influences vary according to circumstance and other external factors.  

However, we wonder why people might still be asking such a question when certain underlying realities are so clear.

While, of course, the financial sector has an important role to play in the trading of oil, the matter has got completely out of hand in recent years, with oil becoming a financial asset benefiting stakeholders far removed from the actual process of getting physical oil to consumers.

Hence, oil prices tend to be influenced heavily by broader-based developments across the extensive international financial sector, and this can result in wild price movements which have little to do with the physical trading of oil. And yet it is the physical trading of oil that can be seriously impeded by this, as we have seen so often recently.

Therefore, as OPEC’s Ministers begin their meeting in Vienna on June 8 - come rain or shine - they will know that, whatever decisions they may take, their efforts to ensure a stable, orderly oil market are likely to be compromised by the excessive levels of speculation that prevail today.

However, they will remain resolute in their quest for stability, because they know that an oil market driven by the fundamental laws of supply and demand will be beneficial to all stakeholders in the industry and supportive of sound world economic growth.

OPEC Bulletin May 2011

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