OPEC : Market direction: STABILITY and volatility?

Market direction: STABILITY and volatility?

OPEC Bulletin Commentary March-April 2008

If we conducted a straw poll of industry watchers, asking each to use one word to describe the current oil market situation, we would hear many using the word ‘volatile’. Yet if these same people were also asked a question about how they viewed traditional market fundamentals, then many would respond with the word ‘stable’. These are two words that are not often seen side-by-side; a sign of a significant market disconnect.

It is clear there is much unease over oil price levels. The upward trend has been with us for a number of years, and at OPEC we have openly expressed our concern about the high level of volatility and upward pressure on prices that have characterised this period. Where possible, and when required, we have also acted to remedy this, through production increases, accelerating both upstream and downstream investments, and even increasing our downstream presence outside of Member Countries.

Extreme price levels, whether they are too high or too low, are damaging to both producers and consumers. We firmly believe that oil must be affordable across the world, supporting economic growth in both developed and developing nations, and providing a fair return to those investing in the oil industry.

The most recent upward movement has occurred in parallel with a sharp slide in the value of the US dollar and, in turn, a move by many investors into crude futures contracts. It is a basic substitution of rising assets for those in decline. This has significantly influenced the short-term oil price, and this dynamic has also lifted the prices of other commodities.

OPEC appreciates how financial markets work, but it is important to keep an eye on the impacts to the oil market of this type of speculation as it can create a climate of nervousness and uncertainty.

In addition, other issues such as persistent refinery bottlenecks and ongoing geopolitical problems have helped push oil prices higher.

Elsewhere, however, the market is pointing away from the direction of higher prices. The traditional oil market fundamentals indicate a market in balance.

At the most recent OPEC Conference on March 5, following a thorough review of the available data, it was observed that the market is well-supplied, with current commercial oil stocks standing above their five-year average. And as we head into the second quarter, a period of traditionally lower demand, there are also expectations for softer fundamentals, as well as increasing downside risks, such as the state of the US economy.

This all helped inform the OPEC Conference’s March decision to maintain production levels to support market stability. The duty of oil exporters is to make sure that fundamentals are healthy. They are.

The next Ministerial Meeting is scheduled for September. It may seem a long way off, but the market needs to settle and take more account of the fundamentals.

Nevertheless, we will constantly monitor the market and are ready at any time to take the necessary measures to ensure adequate supplies. Day-by-day, week-by-week, market vigilance is paramount and we will continue to make decisions based on the overall objective of market order and stability.

How long the oil market remains characterized by both stability and volatility remains to be seen. What is clear is that stability and predictability is always preferable to volatility, and we must hope — and push — for the market to return to the more desirable path.

This Commentary is taken from the March-April 2008 edition of the OPEC Bulletin which can be downloaded free of charge in PDF format from the OPEC website.

OPEC Bulletin (March-April 2008)

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