OPEC : Oil Prices - a time for reflection

Oil Prices - a time for reflection

OPEC Bulletin Commentary January 2008

A new year.
A new start.
And a new time for reflection.

The past 12 months were challenging ones for the world oil market.

Indeed, the present wave of volatility has been with us now for nearly four years, accompanied by frequent upward pressure on prices. This has been a headache for all parties, including OPEC, that are committed to market order and stability.

And so, what are the prospects for 2008?

As is usual at this time of the year, the forecasters have been out in force. Some present a brighter outlook. Others make for gloomy reading. Throughout the tone is cautious.

This is hardly surprising, in the light of recent events.

There is a great deal of uncertainty around. This is perhaps because this lengthy unsettled period has been characterized by fluctuating combinations of key factors affecting the market’s behaviour at any one time, and these factors have been interacting with each other in an often profound and significant manner.

The factors are familiar to us and include: unexpectedly large rises in demand; unanticipated trends with non-OPEC supply; geopolitical developments in various parts of the world; downstream bottlenecks in some major consuming countries; accidents, natural disasters and extreme weather; the declining strength of the US dollar (most recently); and a big rise in speculation.

Arguably and, at least, partially, the market’s volatile behaviour is a product of the times — with globalization, the information age and the jousting between the established old order and the emerging new order in the world economy.

Nevertheless, the volatility of the past few years has been difficult to handle — and yet it must be handled.

OPEC has felt that the area where it can make the biggest contribution is supply. Therefore, in response to perceived shortages of crude, we have increased crude oil supply substantially, as well as accelerated plans to bring on-stream new production capacity. Furthermore, where possible, our Member Countries have been increasing their presence downstream, at home and abroad. Some of our measures can have an almost immediate impact, while others need time to reap the full benefit of the investment.

But one area over which we have little or no influence has been speculation, and we see this as the principal driving force behind the recent volatility and rising prices.

Oil has become a financial asset, like other commodities. Large amounts of money are flowing into the commodities markets to balance portfolio risks and to seek higher returns. Indeed, the recent heightened concern about the falling value of the US dollar has encouraged inflows of new money into the crude oil futures market. The overall effect has been to detach oil prices from the fundamental dynamics of supply and demand.

We are not the only people concerned about the greatly heightened level of speculation. For example, at a joint workshop we held with the European Union in late-2006, on the impact of financial markets on the price of oil, one point that was emphasized was the role of regulation and the need for a supporting policy framework that would benefit all market participants.

Therefore, in seeking to assess the prospects for oil prices in 2008, we all need to recognize that we are operating in an increasingly complex, interdependent global arena and that all parties should act where they can in seeking to achieve sustainable order and stability in the oil market, with fair and reasonable prices, and encourage others to do the same. Above all, something must be done to reduce the damaging hold speculation has over price levels and stability.

Four years is a very long time for a protracted state of market volatility, and let us hope that, in 2008, we finally see an end to it, to the satisfaction of producers and consumers alike.

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

OPEC Bulletin (January 2008)

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