ANALYSIS: OPEC Indecision Underscores Market Sensitivity

- ANALYSIS: OPEC Indecision Underscores Market Sensitivity

Tuesday, June 14, 2011
Rigzone Staff
by Barbara Saunders

Like a seesaw poised to go this way or that, the oil market teeters in a delicate balance in the wake of OPEC's indecisive most recent meeting.

The major producing nations failed to reach an accord on a plan to raise production quotas at the June 8 meeting, marking the first time in some two decades that OPEC members were unable to agree.

Those nations opposed to output increases — Venezuela, Iran, Iraq, Ecuador, Libya, Angola and Algeria — feared that they would lead to a price crash. This would be devastating to the revenues of the already-wobbly economies of these poorer OPEC nations, which have little to no spare production capacity. At the other side, the four proponents of increased output quotas — Saudi Arabia, the United Arab Emirates, Kuwait and Qatar — worry that shortages could loom as spare OPEC production capacity continues to dwindle. This could cause prices to soar, and in turn, snuff out still-fragile recoveries from the extended economic recession.

Swing supplier Saudi Arabia is concerned that its spare capacity is already in the danger zone as consumption continues to be brisk.

Saudi Arabia, determined to remain a reliable supplier, previously swore to expand production regardless of the meeting's outcome. Meanwhile, the consuming-member nations of the International Energy Agency (IEA) have vowed to drawdown emergency stocks if Saudi Arabia doesn't keep its pledge to hike production. The IEA believes that OPEC spare capacity may be much lower than statistics released by the organization. As part of the IEA commitment to energy security, U.S. President Obama says that he's willing to tap the rarely used, roughly 730 million barrel Strategic Petroleum Reserve (SPR.) At this level, the SPR would last for about 34 days at consumption levels of 21 million b/d.

Although there is plenty to be concerned about, one analyst said that the OPEC decision is not one. "The split in OPEC doesn't really affect production plans. In the short-run, the Saudis have already said they're going to be increasing output," Adam Sieminski, director of energy research at Deutsche Bank told Reuters news service. "But what it does do is show the mess the decision making process is in."

But John Feller, chief economist for the American Petroleum Institute, told Rigzone that Saudi additions to supply from spare productive capacity may be of small comfort. "We don't know what the Saudis are going to do," Feller said. "We don't know what they can do. We don't know what volume and type of oil they have to produce in their spare capacity. It might not be very easily refinable."

'Fragile Equilibrium'

Recalling the seesaw analogy, whatever the outcome of the Saudi moves and OPEC, the oil market today is in a very "fragile" equilibrium and it would take little to teeter-totter it in a vastly different direction, Feller noted.

For months, crude oil has hovered around $100 per barrel, fluctuating relatively little around that level on day-to-day market news. Fears of steadily rising consumption — particularly in China — have both some OPEC factions and IEA member nations concerned about the potential for actual supply shortages and price spikes.

On the other hand, there also are worries about whether $100 per barrel is the "magic mark" perhaps already putting a drag on the economy. There is a lag-time between the gathering and assessment of statistics and an actual event, so higher oil prices could conceivably already have led to an economic slowdown. This is why economists watch employment statistics so closely, as these will tend to precede an overall economic deceleration.

The U.S. Bureau of Labor reported very little change from May in its June 3 statistics, with unemployment still hovering at a much higher than normal 9.1 percent. This would tend to indicate that the U.S. economy is still not strong enough to withstand higher priced oil.

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