Opec’s public views on the market are puzzling, as it sees no tightness
despite demand rising and falling stocks. But higher Saudi output suggests
greater private understanding of the realities of oil market fundamentals.
Rising oil prices are putting a strain on relations between producers and consumers as the debate over market fundamentals intensifies. The IEA is worried that higher oil prices could derail global economic recovery and wants Opec to “show more flexibility” over its output decisions. Opec secretary- general Abdullah al-Badri denies any tightness in the market and accuses the IEA of scaremongering and inconsistency.
Yet oil markets are tightening, despite Opec’s claim to the contrary. Global oil demand continues to grow strongly, rising by 2.6mn b/d (3pc) last quarter compared with a year earlier, according to Argus data. Non-Opec oil supply and Opec non-crude output together gained an impressive 1.6mn b/d over the same period, but this was not enough to keep pace with surging demand. Global inventories fell by 800,000 b/d in the fourth quarter, extending a deep third-quarter stockdraw that helped lift crude prices above their previously stable $70-80/bl range.
Opec’s view of market fundamentals is out of date. The supply and demand balance published in its latest Monthly Oil Market Report shows a small global stockbuild in the fourth quarter, when all the evidence from reported stock changes adds up to a 700,000 b/d stockdraw. And Opec’s estimate of global oil demand growth in 2010 is 1mn b/d lower than most other analysts. Data collected by Argus and the IEA indicate a 2.7mn b/d rise in global oil demand last year. But Opec’s estimate is only 1.6mn b/d.
Differences of opinion over market fundamentals are not new, but it is unusual for such large discrepancies to persist once most of the underlying data are available. Opec appears to be trying to justify policy decisions by using out-of-date assessments of demand. Opec data show hardly any increase in the call on Opec crude last year and a small global stockbuild — a view supporting output restraint. But Argus and IEA data show an increase of around 1mn b/d in the call on Opec crude in 2010 and a significant global stockdraw — indicating a tightening market.
Opec’s latest comments on the market may have some basis — however flawed — on the group’s data for last year, but they appear to be at odds with the group’s outlook for 2011. Opec expects the call on its crude to rise by 350,000 b/d, close to the IEA’s 400,000 b/d. So, despite airing public differences of opinion in increasingly strident tones, not much separates the two protagonists. The debate is strained because Opec does not like to be held responsible for rising oil prices, as al-Badri’s sharp riposte to IEA criticism indicates. But the organisation’s reluctance to acknowledge that it should discuss officially boosting output is becoming increasingly untenable as the fundamental evidence accumulates. And what Opec says is not the same as what Opec members do.
Saudi Arabia’s production is rising and the country has cut official formula prices for its heavy crudes to the US and Europe for January and February. Opec’s more hawkish members say they are happy to see oil prices over $100/bl, but Saudi Arabia is more cautious and has the power to restrain prices. Opec’s forecasts for this year indicate that it needs to increase output. Higher Saudi output shows that this fact has registered.
