x Abu Dhabi, UAESaturday 22 July 2017

OPEC seems keen to draw Viennese blinds

As the price of oil heads towards its second highest annual level in the group¿s 50-year history, the oil exporters are hoping to fly under the radar.

Wilson Pastor, centre, the OPEC president and Ecuador’s oil and mines minister, at the group’s meeting in Vienna last week.
Wilson Pastor, centre, the OPEC president and Ecuador’s oil and mines minister, at the group’s meeting in Vienna last week.

OPEC appeared uncomfortable in the spotlight of the global media last week in Vienna.

Perhaps members were a little embarrassed that oil revenue this year is on target to be the second highest in the history of the 50-year-old organisation as the world faces the prospect of a double-dip recession.

There was almost an audible sigh in the OPEC conference hall last Thursday as Wilson Pastor, the group's president and the energy minister of Ecuador, announced that his country would host the 12-member oil exporters group in the capital Quito as early as December.

There is little appetite to take centre stage so soon again, especially as many believe oil at US$80 a barrel defies the logic of basic supply/demand economic gravity. The compromise with the "no meeters" appears to be the postponing of the usual March OPEC ministerial conference next year by three months until June, leaving a seven-month gap of silence.

Long gone are the days when OPEC was keen to meet six or seven times a year to micro-manage the oil market and ensure prices remained within a whisper of its desired target price, which is currently $75 a barrel.

Prices remain locked spot on their bull's-eye target even at a time when crude inventories are well above five-year averages, bolstered by OPEC's pumping of two million barrels a day above its own target limit into an oversupplied market.

"Sshhhh, don't tell anybody!" "OK, I won't," the refrain goes. "But please stop holding meetings and attracting the world's attention to this contrarian phenomenon."

Obliged by the OPEC charter to meet twice a year, there is a rising consensus within the group to cut that down to once. The motivation for such an amendment would be to stay out of the way of an oil market that is more than happy to deliver a price 50 per cent higher than the average of the past decade for reasons unrelated to the basic fundamentals.

Oil futures have gained as the US dollar slips on speculation that the Federal Reserve will ease monetary policy further - that is, print more cash. A lower dollar boosts the purchase of crude and commodities as an alternative investment.

"Everyone is happy with the market," Ali al Naimi,the oil minister of Saudi Arabia, stated several times during his five-day stay in Vienna for what, in the end, was a three-hour meeting of the OPEC conference. "Consumer, producer, everyone is happy!"

Some may disagree with this thesis. A US jobless rate hovering stubbornly near 10 per cent is shaking consumer confidence and limiting spending, the biggest part of the economy.

Nouriel Roubini, the chairman of Roubini Global Economics in New York, says weak US growth in the second quarter means the odds of a double-dip recession are as high as 40 per cent from the previous 25 per cent forecast.

Federal Reserve policymakers last month said US growth was likely to be "modest in the near term" adding that they were prepared to ease monetary policy further if needed. The recovery of advanced economies including the US is likely to be anaemic, said Dr Roubini.

The last time the world's largest economy tipped into recession in 2008, oil prices went into freefall from a record $147 a barrel to the valley floor of about $30 a barrel in a few short months.

Could the same happen again? If OPEC drowns the market in two million barrels a day more oil than its own research advises, it does so at its peril. Perhaps, like most other commodity markets, OPEC is betting that the China juggernaut will pull all else behind it and maintain a strong, healthy appetite for the black gold. But an Asian surprise may emerge once again to derail the best-laid plans.

China's crude purchases increased 11 per cent to 23.29 million tonnes last month compared with a month earlier, according to preliminary data released by the General Administration of Customs in Beijing. That beat a previous record of 22.27 million tonnes in June.

The US energy department also raised its demand outlook last week. The world will consume 86.06 million barrels a day this year, the department forecast in its monthly Short-Term Energy Outlook. That's up from 85.95 million last month and 84.33 million last year.

In the US, the saying "remember the Alamo" has lasted more than 150 years. In OPEC there was a line of thinking for most of the past 13 years that went something like "remember Jakarta", but it would appear memories are fading.

That fateful OPEC meeting in the Indonesian capital, when the group decided to raise oil output by some two million barrels a day as the Asian crisis of 1997 was starting to bite, sent prices tumbling to less than $10 a barrel and came close to bankrupting OPEC's biggest producers.

The group spent five years trying to rehabilitate the oil price, making savage production cuts to get crude back to $20 a barrel. They must be hoping that this time silence is golden.

Sean Evers is managing partner of TheGulfIntelligence.com and the former Middle East bureau chief for Bloomberg News and TV