When the oil companies were setting the price of oil prior to 1973 and when Opec took over this role between 1973 and 1986, oil prices were relatively stable and its development easy to follow. However, after Opec abandoned this role, oil pricing has become the domain of the market which tends to treat the oil like any other commodity.

In today's fast changing market, following price development is an arduous task. In the last four years prices have gone up close to $145 a barrel to as low as $34 a barrel though the average is $87.95 a barrel.

Oil producers, consumers, traders, refiners, oil companies and governments are in need of oil price assessment almost on a continuous basis. This role has been taken and developed by specialised oil media publications where activities include not just crude and product price reporting but analysis of factors contributing to the price evolution.

Last week, I attended some presentations in Dubai by Platts, one of the major price assessment publications of widespread use in the oil industry. Platts market specialists not only discussed their methodologies of price assessment and how it is developed in cooperation with major market participants but also discussed the complexity of today's oil market and what is actually moving it.

Fundamentals

The price of oil is affected by the fundamentals of supply and demand but these themselves are affected by events across the economic landscape and the incidents in producing countries or transportation system. The forces of geopolitics are indeed having a strong influence on oil prices.

On the economic front, Europe is in danger of a deep recession and while the US is holding, it is afraid of contagion and China, the largest trading partner with Europe is already slowing down.

Europe accounts for 17 per cent of world oil demand or about 14.5 million bpd and its demand growth has been stagnant for some time. The US is now importing less than it was two years ago and its net imports have gone down to 8 million bpd due to reduced demand and increase of its shale oil while the economy reduced gasoline demand by about one million bpd.

A strong action on the economy might avoid the crisis. Otherwise oil demand will be impacted and oil prices can fall accordingly.

On the geopolitical side, the centre of attention is still around the Arabian Gulf where threats and counter threats regarding the Strait of Hormuz are proving to be a big price mover. In addition, the complications of the Iranian nuclear file and the turmoil in many Arab countries are having their impact on prices.

If any of these, especially the closure of Hormuz, leads to a major war then oil prices may rise to unprecedented levels.

Therefore forecasting oil supply and demand balances are often changing in pursuit of changes in the above factors. In July 2011 the International Energy Agency (IEA) predicted oil demand for 2012 at 90 million bpd and raised the forecast to 91.1 million a month later. However, IEA has been lowering its forecast by the month and now stands at 89.9 million bpd. Similarly Opec started with 89.4 million and fell to 88.8 million in the period.

The above is also affecting the refining industry where "3 to 5 million bpd of oil refining is under immediate threat or recently closed. An estimated 7 million bpd needs to close to adjust for more efficient refining in Asia and the Middle East."

There are so many crude oil streams that it is difficult to price all of them separately. Hence the necessity to benchmark crudes where all others can relate to them after their prices are assessed.

New additions

Brent is benchmark to the largest volume of crude and because its volume has gone down some time ago, other crudes are added to the Brent system in order to keep the benchmark acceptably active.

Still the Brent basket (BFOE) volume went down from 1.8 million bpd in 2005 to one million now and some modification by new additions can be forthcoming.

Dubai crude became the most important marker for Asian destinations but because its volume now is only 60,000 barrels a day, Upper Zakum (650,000 barrels) and Oman (880,000 barrels) are now part of the Dubai basket where about 10 million bpd are priced relative to Dubai.

 

Saadallah Al Fathi is the former head of the Energy Studies Department in Opec Secretariat in Vienna.