Looking on the bright side in 2012

OPEC Bulletin Commentary December 2011/January 2012

There is always something special about a New Year.

The optimist might say: "Things can only get better." And the pessimist? "Well, things can't get any worse. Or can they?"

2011 will be a strange act to follow for the world oil industry. Three events stood out as being both highly significant for the industry - potentially, at least - and largely unforeseen by those closest to it.

These were the political developments in parts of North Africa and the Middle East, the re-emergence of the global debate on nuclear power after the triple tragedy in Japan and the Euro-zone sovereign debt crisis.

The industry had to deal with them as best it could, with little or no prior warning, at the same time as attending to the more familiar, longer-standing challenges, which themselves are complex enough as it is, such as ensuring adequate oil supply at all times and maintaining fair and reasonable prices.

At this time of the year, one might well ask: "What does 2012 have in store for us?" But, after the unpredictability of 2011, perhaps it is better to remain silent on this one!

We cannot, of course, do that. Attending to the future is very much part of OPEC's business.

However, while there is always scope for further unpredictable developments, there are, in more positive vein, some persuasive indicators about what to expect in the core areas of the international oil market as we settle into the New Year. These revolve around a continuation of the patterns that emerged in the second half of 2011 and which saw significant downward revisions to growth estimates for both the world economy and oil demand (further details can be found in Market Spotlight on page 4).

The 160th Meeting of the OPEC Conference elaborated upon this on December 14, with the closing press release stating that "the Conference further observed that downside risks facing the global economy continue to include: the sovereign debt crisis in the Euro-zone; persistently high unemployment in the advanced economies; and inflation risk in the emerging economies. Planned austerity measures, not only in the Eurozone, but also in other OECD economies, are likely to contribute to lower economic growth in the coming year. The Conference noted further that, although world oil demand is forecast to increase slightly during the year 2012, this rise is expected to be partially offset by a projected increase in non-OPEC supply."

The clear message from this is that there is still much uncertainty in the oil market. What is more, this uncertainty is exacerbated by the heightened price volatility witnessed in 2011 and which has been very much due to increased speculation in commodity markets generally.

At least, on the plus side for decision-makers and analysts, there is a broad consensus - shared by OPEC, the International Energy Agency and other such groups - about the direction in which the oil market is likely to head in the coming months, even if it is less easy to put this into numbers.

Indeed, this was the market outlook facing OPEC's Ministers when they met in December, and so their decision "to maintain the current production level of 30 million barrels/day, including production from Libya, now and in the future" was an understandable one, especially, as the press release went on, "given the demand uncertainties."

The agreement restored an important degree of certainty to the supply side of the market in these very uncertain times. On top of this, it added much-needed flexibility, with the pledge that "Member Countries would, if necessary, take steps (including voluntary downward adjustments of output) to ensure market balance and reasonable price levels."

Afterwards, OPEC Secretary General, Abdalla Salem El-Badri, described the Meeting as a "successful and fruitful" one that had "brought back the spirit of cooperation" to the Conference, after the inconclusive end to the 159th Meeting of the OPEC Conference in June. He added: "The market is well balanced at the moment and prices are reasonable. The new production ceiling is suitable for both producers and consumers."

This is good news for the oil industry as we enter the New Year. And let us hope that the optimists rather than the pessimists prevail in 2012!

Happy New Year to all our readers!

OPEC Bulletin Dec.11/Jan.12

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