Admittedly, the report from Emirates Business 24/7 (hat tip reader Michael) is only one expert’s opinion, but it focuses on an issue that hasn’t gotten the attention it warrants, namely, the level of the current oil glut and how much it is going to take to work it down. The subtext of this piece is that absent a pickup in oil demand, it is going to take quite a lot of discipline among OPEC members, far more than they have exhibited to date, to get oil prices to a presumed target level of $75 a barrel.
From Emirates Business 24/7:
A prominent Arab energy analyst has blamed Opec for the collapse in crude prices, saying the oil cartel has failed to fully comply with output cuts and kept sending contradicting messages to the already sceptic market.
Nicholas Sarkis, Director General of the Paris-based Arab Petroleum Research Centre (APRC), which acts as an adviser to the Organisation of Arab Petroleum Exporting Countries (Oapec), described Opec’s behaviour in dealing with the faltering crude demand over the past few months as “suicidal.”
In an article published in the APRC’s monthly magazine, Arab Oil and Gas, Sarkis urged the 12-nation Opec to announce a target for its oil price and to abide by output reductions to attain it…..
“For the third time in a row, the latest meeting held on December 17 had the immediate impact not of bringing about the hoped-for rebound in prices but of speeding up their collapse, so much so that the monthly average value of the Opec crude basket fell from $112.4 in August, the month preceding the first of these Opec gatherings in September, to $49.7 in November and an average of $34.9 in the week that followed the December meeting,” he said.
“At first sight, this calamitous outcome may seem particularly surprising insofar as the organisation decided in the meantime to implement relatively large cuts in production, reducing output by a total of 4.2 million bpd from January 1.”
Sarkis cited three main reasons for Opec’s failure to prevent the price crash including the fact that the latest reductions remained ink on paper until January 1 and the previous cut of 1.5 million bpd was not fully enforced, with the rate of compliance by its members not exceeding 55 per cent.
Yves here. Note that that level of compliance is far below what we have seen claimed elsewhere, but is consistent with Nigeria complaining about cheating prior to the last OPEC meeting. Back to the article:
He said the second reason is that the surplus of supply on the world market has led to a sharp increase in industry stocks in industrialised countries, which reached an estimated level of fully 2,707 million barrels at the end of November, equivalent to more than 57 days of forward consumption, or five days more than the average of 52 days that are regarded as “normal”.
He noted that the level of stocks corresponds to double the annual output of Iran and to more than five times the production of Algeria….
“Just to return to a level of stocks that can be regarded as more normal, which is to say to soak up a stock surplus corresponding to five days’ consumption, or some 240 million barrels, Opec countries would now have to start applying absolutely strictly the cumulative reduction in output of 4.2 million bpd for a period of nearly two months, provided, of course, that world demand did not decline further, especially in the run-up to next spring, when world needs could decline by 0.9-1 million bpd relative to the first quarter of 2009,” he said.
“A third reason, but by no means the least, for the failure of Opec decisions is the widespread scepticism with which they were greeted by the oil markets. That scepticism is attributable first and foremost to the partial compliance with the 1.5-million bpd cut in that was due to take effect on November 1….”
According to Sarkis, several official communiqués released by Opec over the past few months “curiously omit to give an exact figure for the desired level of prices and a clear road map for getting there”. He said things would certainly have been different if exporting countries had decided at their last three conferences simply to return to the system in use before the war in Iraq in March 2003, “which entailed setting a floor price and a ceiling price for their exports”, as well as implementing automatic, precise reductions and increases in production to attain their ends.
In the current circumstances, he added, the price of $75/b that is regarded as desirable by Saudi Arabia and many others represents a good average of the figures that have been more or less explicitly suggested by various officials in both exporting countries and industrialised nations.
“Restoring oil prices to a level of at least $75 seems that much more necessary insofar as an almost unanimous consensus is evident on both sides about the fact that the level to which oil prices have fallen can only discourage investments both in the hydrocarbon industry and in those involving the development of other energy sources, ” Sarkis said….
“As far as a possible recovery in oil prices is concerned, we will now have to wait and see the full scale of the cuts in production implemented in both Opec and non-Opec countries. Another positive factor could be acceleration in the closure of wells and small fields that have become unprofitable in the current environment, especially in North America.”