Oil prices last month were on a real roller coaster but resistance to a precipitous fall was evident too. The fall of oil prices from almost $80 (Dh294) per barrel sometime in January to as low as $70 per barrel early in February was beyond expectations. However, and apart from a dip at the end of the first week of February to about $69 per barrel, prices began to recover gradually. The average for the Opec basket of crude oils may be slightly over $73 per barrel where the end of the month prices may have reached $79 per barrel. Yet the average is $3 per barrel less than that of January.

Concerns

Many factors contributed to this behaviour such as the rise in temperature and the reduced demand for heating oil, a stronger dollar for a while and the slide in the equity markets but most importantly renewed concerns about the economic recovery. In spite of the International Monetary Fund (IMF) revision of its forecast for world economic growth in 2010 from 3 to 3.4 per cent, the reality is that unemployment is still at high levels in industrial countries especially the US and Europe is now fearful of sliding further into the recession. Therefore the growth is again led by developing countries, especially China and India.

The Opec Secretariat has maintained its forecast for 2010 for a demand increase of only 0.8 million barrels a day (mbd) and an average call on Opec crude of 28.8 mbd, or about 0.4 mbd less than its current production. The International Energy Agency (IEA) however, revised its demand upward by an additional 0.17 mbd or 1.6 mbd above 2009 to make the call on Opec crude at 29.4 mbd. The American Energy Information Administration forecast demand would increase by 1.2 mbd in 2010 and predicted oil prices to average $81 per barrel in the second half of the year.

Therefore the signals are mixed from these forecasts because of the concern and the differing views about the state of the economy and the dollar value. But the market has received some support from the Federal Reserve's Chairman Ben Bernanke where he indicated keeping the interest rates down for a few more months to support the recovery.

Support also came from the BP chief executive as he said "world oil demand will peak at a maximum of 110 mbd after 2020" contrary to other forecasts of much fewer barrels. At the same time, BP's chief economist told the media that oil is likely to hold in its current price range during 2010, although some upward movement could be possible as Opec production is likely to set a floor for oil price movement.

This brings us to the expectations of the next Opec meeting on March 17. The majority of statements heard so far are that Opec will not alter its agreed production ceiling of 24.845 mbd, excluding Iraq. Though some other statements said all options are open, it is widely expected no changes to the production level are to be expected. Opec is aware that it is approaching the second quarter of the year where demand is usually 1.5 to 2 mbd less than the first quarter but reducing its production ceiling would be seen as rendering an obstacle to economic recovery. At the same time Opec is concerned that prices can go down below the much talked about range of $70 to $80 per barrel and therefore it is likely the meeting will stress the importance for member countries to adhere to their agreed production levels. Compliance now is close to only 58 per cent and countries like Angola and Nigeria are at zero per cent compliance while Iran is at only 20 per cent. To avoid prices declining in the second quarter Opec must tighten compliance as the only reasonable option open to it.

Cooperation

The US Energy Secretary's visit to the region was thought by some to ask key member countries in Opec at least not to reduce the production ceiling at this time. However, Secretary Steven Chu insisted on cooperation and stated "volatility is a bigger concern to the US than the overall price level of oil" pointing a finger at financial institutions and promising to reduce the role of speculation in the market. While this is welcome, his visit must have other undeclared aims related to the general strategic situation in the region and the threats to oil supplies.

Let us hope for more stability in the market at a time when many countries are revisiting deferred projects to ensure future supplies of oil and its products.

 

The writer is former head of the Energy Studies Department, Opec Secretariat, Vienna.