Traders expect oil prices to hold in a narrow range in the coming weeks as fundamentals remain little changed with demand firmer in the second half of the year and global inventories still at multi-year lows. Supply issues will focus on OPEC, the outlook for the flow of Iraqi oil, and the possibility of sharp price spikes when unexpected supply disruptions occur.
Over the past year, the tight supply conditions have helped prices to shoot up when unexpected political, military or weather events occurred. Oil traders have been more jittery than in the past, as proved by active buying in recent months on developments in Iraq, Venezuela, Nigeria and storms in the Gulf of Mexico.
At press time (July 30), traders expect OPEC’s meeting in Vienna on August 2 to roll-over its production quota of 25.4 million barrels/day for the second half of the year. Iraq has yet to emerge as a major products exporter, more than three months after the fall of President Saddam Hussein. Previous calls for an output cut in order to accommodate the return of Iraqi oil to global markets are likely to be ignored, in recognition of current high prices and long-term delays in raising the war-torn country’s exports back to pre-war levels, they said.
The full version of this story is available in the August 2003 issue of EnergyAsia Report.
OPEC can relax
“The meeting was only hastily scheduled, in case Iraqi oil began to flow,” noted GNI-Man Financial trader Rob Laughlin.
Although regular export contracts have now been signed, shipments are “only coming out in a trickle,” he said, making any output cuts by the 11-member Organisation of Petroleum Exporting Countries unnecessary at this stage.
Analyst Peter Loxton of financial markets information service, MMS International agreed: “The consensus at the moment is that OPEC is likely to roll over the existing output quota.
“People are not expecting much from OPEC’s meeting, and they are likely to keep quotas unchanged,” said Deutsche Bank analyst Jay Saunders.
“I don’t think OPEC really knows how quickly Iraqi exports can be increased and for this reason will probably keep production levels as they are for the moment. Some people are saying Iraq can hit 1.5 or 1.75 million b/d at the end of the year, but it is very difficult to predict these things with any accuracy,” he said.
SG Bank’s Frederic Lasserre said that the uncertainty surrounding the resumption of Iraqi exports led OPEC to over-react in managing its supply.
“This explains Saudi Arabia’s decision to reduce its exports to an extent that now seems unjustified. Now that some of the uncertainty has been removed as the local authorities have confirmed that Iraqi exports will not exceed 1.5 million b/d before the end of the year, OPEC has plenty of time to readjust its production so as to calm the current tension on prices.”
Mr Lassere said this and next year’s price trends will be determined by OPEC’s efforts to protect its market share. He predicts Brent crude to average US$22/barrel for 2004, revised from a previous forecast of US$20/barrel.
“When prices are above US$20/barrel, it is up to OPEC alone to rebalance the market. But once prices move towards US$18, OPEC will require support in reducing supply. We have factored an agreement in this respect into our central scenario.
“The agreement will provide for a shared reduction in output of 2 million b/d, with 500,000 b/d for non-OPEC producers and 1.5 million b/d for OPEC 10. On this basis, we have raised our annual price forecast for 2004 from US$20 to US$22.”
Analyst Mike Fitzpatrick of Fimat Futures said “Iraqi production is coming back, and regular term-export contracts have been signed. That is encouraging, but export levels are coming back in a dribble — the amount is really very small,” he said.
The oil-producing group, which pumps a third of the world’s oil, typically adjusts output in order to maintain crude oil prices within its preferred US$22 to $28 a barrel range against a basket of benchmark oil contracts.
Mr Loxton at MMS International noted that oil prices are currently trading within this bracket, citing this as a further reason why output quotas are unlikely to be adjusted at this stage.
OPEC’s reference basket of seven crude oils stood at US$27 a barrel as of July 23, having traded within the upper half of the group’s target range since mid-May.
Benchmark Brent crude, used to price two thirds of the world’s internationally traded oil, has traded in a US$25-29 a barrel range during this period.
It may be some time before Iraq’s output starts to have an impact on the market, analysts said.
The widespread looting of industrial equipment and repeated acts of sabotage against Iraq’s vulnerable fuel pipelines have led to delays in restoring the country’s production to pre-war levels of around 2.5 million b/d.
Not all industry-watchers agree that current OPEC output levels are satisfactory.
Some participants have even called for OPEC to open the taps, in view of the delays in restoring Iraqi exports.