Opec meeting will test Saudi Arabia's credibility

Abu Dhabi: The December 17 Opec meeting will put Saudi Arabia's credibility on the line: Either significant cuts will be announced - in which case Opec would have been successful in getting members to slash production - or they will put the best face on Opec's inability to discipline members by saying they are satisfied with market adjustments and glad to help the world out of its economic recession with cheap crude.

But with Russia, the second-largest exporter after Saudi Arabia, signalling its willingness to cooperate with Opec goals, markets became believers last week that supply would indeed be reduced in an attempt to balance it with shrinking demand.

Unlike Opec, a supply group requiring delicate negotiations to change output quantities, all Russia need do is decree it and supplies will be reduced. Russia's willingness to follow Opec is seen as a strong signal from world suppliers that market supplies will in fact be cut.

But this new friendliness and cooperation must produce tangible cuts soon: US gasoline prices are now averaging $1.63 a gallon, or Dh5.99 a gallon, and still driving is reduced and crude oil consumption continues to decline.

Evidence

Meanwhile evidence is accumulating that China's economic soft landing might actually be extremely hard, with significant economic pain nearby. This would hamper crude oil price gains in the near term.

Two weeks ago this column stated that, according to available data, commercial players in the US, the world's largest oil consumer, were thinking that oil prices had bottomed out around $50 a barrel and had stopped shorting their physical crude supplies on the futures market.

But the past week's gloomy econ-omic statistics, plus the apparent imminent collapse of the US auto industry, prices dived for most of the week, strengthening only when it appeared the Big Three would be rescued by White House executive order.

New data are showing commercials buying on the futures market, thus protecting their physical needs from expected rising prices.

After declining most of last week and hovering around $39-$40, the DME Oman benchmark crude nearby contract broke to the upside of $40 in after-hours trading.

On Thursday Oman gained almost $5, closing in after-hours trading at $45.15. Oman closed out the week in after-hours trading settling to $45.05.

The New York Mercantile Exchange's benchmark West Texas Intermediate light sweet crude contract finished the week at $46.28, up strongly from $40.81, but still down from the previous week's $54.43.

Brent also gained strongly on the Opec-Russia cooperation news, finishing the week at $46.75. The Chicago Board Options Exchange's OVX crude market volatility index reached historical highs, closing the week at 93.05.

Increased volatility is one of the strongest signals that markets may be turning.

US natural gas

The New York Mercantile Exchange's nearby natural gas contract closed the week at $5.48 p[er million Btu, down slightly from last week's close of $5.74.

Expectations of lowered commercial energy demand, as well as increasing North American supply prospects, continue to weigh down US natural gas prices. Expect gas cartel discussions to continue.

The writer is associate professor of economics and petroleum market behaviour at the Petroleum Institute, in Abu Dhabi.