Libya _Any softness in oil prices will be momentary&

gulfnews.

As expected, the 165th Opec ministerial conference ended after a brief meeting in Vienna on June 11 without any change to the previous decisions regarding the level of production ceiling. In his opening address, the president of the Opec conference, Omar Ali Al Shakmak, who is also the acting minister of oil and gas in Libya, said: “We [have] witnessed improving stability in the oil market, resulting from an upturn in the world economy.”

It was clear from the opening address where the conference was headed. Al Shakmak cited the world economic growth of 3.4 per cent, annual demand growth of 1.1 million barrels a day (mbd) and non-Opec oil supply increase by 1.4 mbd as leaving no room for Opec to raise production ceiling.

Especially as oil prices have hovered in a narrow range of between $105 and $110 a barrel and the average Opec basket price so far this year is over $104 a barrel. “This is a level that is acceptable to both producers and consumers,” the president said.

The final communiqué from the conference also stated “the relative steadiness of prices during 2014 to date is an indication that the market is adequately supplied, with the periodic price fluctuations being more a reflection of geo-political tensions than a response to fundamentals.”

Therefore, “the Conference again decided that Member Countries should adhere to the existing production level of 30.0 mb/d”, with the promise that member countries would respond “to ensure market balance”.

In fact, Opec crude oil production is probably below the production ceiling anyway. Libya’s production is still only close to 200,000 barrels a day, down from 1.6 mbd. Iran’s is still limited by Western sanctions and Iraq’s production, though increasing, is still below promised targets.

It is quite possible that the actual average Opec production in 2014 may end up close to the current forecast level of 29.7 mbd, which according to the Opec’s June Oil Market Report is 0.4 mbd less than in 2013 and close to the actual Opec production of May 2014.


Assessment

In its assessment of the market in the second-half of the year, the Report says: “There is sufficient evidence that higher economic growth in the current quarter will materialise” and “World oil demand in 2o14 is expected to increase by 1.2 mbd over the same period last year”, or slightly above the growth in the first-half. Therefore, “Opec crude in the second-half of the year [stands] at around 30.3 mbd, slightly higher than in the first-half of the year”, but also higher than actual production now.

In any case, the oil market never fails to get support from non-fundamental factors here and there. While the crisis in the Ukraine is still brewing, the Libyan situation without a foreseeable resolution, the market suddenly got support from the events in Iraq where an uprising has made large swathes of the country and oil facilities outside the control of the government.

Oil prices rose to a nine-month high on Friday where Brent crude rallied by $3.07 to $113.02 a barrel on London’s Exchange.

Although Iraq’s exports have not been affected so far, the market is acting in anticipation that things may get worse. Northern Iraqi exports have been out for almost three months now and what remained of Kirkuk production was being used by domestic refineries. But the main refinery in Baiji, at 300,000 barrels a day, is now outside the Ministry of Oil’s control, a situation that may lead to increased product imports into the country.

But Opec and the oil producers cannot get complacent. Some analysts still think that oil prices are high and may be headed for a correction.

They point to the expected increase of US and Canadian production, the uncertainties or slowdown in the Chinese economy, tightening in monetary policies of many countries as they get away from quantitative easing and, more importantly, the fact that production in Iran, Libya, Iraq and Venezuela may recover or advance.

However, any major correction of oil prices or a “bust”, as some like to call it, will almost immediately slow down shale and oil sands production in the US and Canada and impact Opec revenues so much as to invite the organisation to act, even though reducing production is also painful.

Jesse Colombo writing in Forbes (June 9) says: “The only cure for high prices is high prices” in order to keep the expensive shale and oil sands production going. If oil prices are to suffer a big correction, it will probably be short-lived and upward correction may follow.

— The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.