Iran and Venezuela are the two price hawks in the 13-member Organization of Petroleum Exporting Countries (Opec), which are virtually openly vowing to defend $100 a barrel as the benchmark price for oil. Such aggressive posturing, triggered, no doubt, by oil prices sinking to a five-month low, betrays a lack of their appreciation of an all-round fall in demand under the weight of credit crunch and high prices.
The oil market in line with the commodity market in general caught cold as the Organisation for Economic Cooperation and Development (OECD) forecast weaker growth through the year-end. The toxic combination of a turmoil in financial and housing markets and high commodity prices continues to “bear down on the global growth”.
The Opec hawks were certainly not ruling out the possibility of oil prices moving back to below $100 a barrel if the cartel members continue to produce in excess of the earlier agreed quotas in the face of a falling oil demand in the US and other developed countries.
Demand for oil imports in China, India and some other emerging nations may still be strong, but that is not proving enough to compensate for the fall in demand in the developed world.
What is unnerving for Iran and Venezuela is while oil production is virtually stagnant at 86 million barrels a day since 2005, the plunging demand is causing a “rapid and sharp” oil price fall since the record $147.27 a barrel price seen in July. Nobody will miss the cry of desperation in the Iranian oil minister’s pronouncement that the weakness in the market was because of the oversupply of the commodity.
“Oil supply must be well proportioned with demand and control over Opec’s excess oil supply is an issue,” said the minister. Actually any panic in the oil market is a case of demand for oil becoming weaker and weaker. It will be recalled that Saudi Arabia, credited with spare drilling capacity and coming under pressure from the US, raised production since June in two instalments by half a million barrels to 9.5 billion barrels a day.
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It need not be said that if Iran has a message, it is only for Opec members to roll back any extra production that they may have been doing at the bidding of the West. Incidentally, Opec accounts for 40 per cent of the world oil production.
In the first place, one will be wondering why any Opec member should be complaining about the recent fall in oil prices. Earlier this year, when oil prices were shooting and fanning the inflationary fire, which had already become a point of global concern, Opec maintained that high energy prices were not justified by fundamentals. Opec squarely blamed speculators for the price rise.
According to most experts, the stagnating global production, particularly in non-Opec facilities, when the demand for oil in emerging markets led by China was soaring, is the real culprit. Non-Opec oil production may already have peaked while there remain doubts about the Opec claims of its oil reserves. The message here is clear. Whatever the Iranian shenanigans, Opec is also approaching the physical limits of production.
Oil guru David Strahan has put the whole thing in the right perspective. He says oil production is in “terminal decline” in 60 of the 98 oil-producing countries. What is principally to blame for production stagnation is that the world is finding less and less new oil reserves over the last 40 years. Strahan says, “for every barrel we discover, we consume three”.
Oil prices globally are dollar-denominated. It was, therefore, only natural that traders, including hedge funds, would see in oil a safe haven when the dollar started slipping vis-a-vis other currencies. Now the tide is turning in the dollar’s favour and traders are moving out of oil.
Whatever happens to the oil market from now on is there is consensus that oil prices will not go back to previous cyclical lows. The new phenomenon will be explained by the fact that, unlike in the previous cycles marked by huge investments in drilling and refinery capacity-building when oil prices would be ruling high, we have not seen similar investment action on the crest of the current cycle.
New capacity in the past came on stream just as demand would begin to slow, leading to a price collapse. For obvious reasons, this is not going to happen now. As there is not much new capacity ready for commissioning, we are not to see any surge in supply. What will also save the day for oil producers is the China and India factor.
Demand for oil imports in China and India may somewhat slow down in the short and medium terms, but in the longer term, their imports will grow rapidly. Iran and Venezuela should not be complaining even if oil trades below $100 a barrel. Was not oil selling at around $75 a barrel a year ago?