Three weeks ago I took the view that "rarely has the world economy been in such an uncertain condition with oil supply plentiful and at the same time oil prices the level they are".
Well, oil prices are on the decline as the price of the Opec basket of crude oils fell from $124.64 a barrel on March 13 to $117.08 on May 1 and then further persistent and sharp decline took it to $103.49 on May 24. The average price for May is likely to be around $109 a barrel as compared to $118 a barrel for April.
Iran crisis
It is not clear whether the momentum of declining oil prices will take the level further down. The decline started by the anticipation of some progress in the talk between Iran and the five permanent Security Council members besides Germany first in Istanbul and more recently in Baghdad. But the Baghdad meeting seems to have made little progress and the only outcome is another scheduled meeting in Moscow towards the middle of June with many observers giving dire forecasts. Both sides have taken entrenched positions and Iran appears to be playing for time to avoid the start of European sanctions by July and counting on conditions in Greece, Spain and Italy, the countries most dependent on Iranian oil, to soften their position.
The economic situation in members of the Organisation for Economic Cooperation and Development (OECD) has also contributed to the price decline amid disappointing economic data for the US and Europe.
Prices fell over $4 a barrel in one day on the American market early in May after a weak US jobs report offered further evidence that the global economy is weakening or uncertain. Although consumer confidence is on the rise, the $2-billion (Dh7.34 billion) JPMorgan Chase loss is yet to play its course.
Even China is reported to be slowing down as industrial production in April grew at its slowest pace in nearly three years.
Given the bleak picture it is surprising that forecasters are not modifying their world economic growth of 3.3 per cent this year even as developing countries especially China and India are still growing at high rates.
While oil demand, especially in the OECD will be affected by the economic situation, the supply side also played its role in weakening prices. Opec production in April is reported to be 31.62 million barrels per day (bpd) according to Opec and 31.85 million bpd according to the International Energy Agency (IEA) as increased production from Saudi Arabia, Iraq, Nigeria and Libya is putting Opec production well ahead of its target of 30 million bpd.
Opec statements
Opec also seems to be talking the market down not only by its production but by its statements. The Saudi oil minister, Ali Al Naimi said recently in Australia: "We want a lower price than where it is now." He even suggested that $100 a barrel would be a more acceptable price.
Opec Secretary-General Abdullah Al Badri reiterated the statement. "We are not happy with prices at this level because there will be destruction as far as demand is concerned."
Saudi Arabia even indicated the availability of 80 million barrels in ready storage in the event of any emergency. Therefore, producers stocks are adding to the already high Western consumer stocks which are reported to be much higher than the five years' average thus wiping the declines of few months earlier.
The decline in oil prices may not continue as we are approaching the cost of production of some marginal supplies and the IEA expects prices to remain high due to the tensions over Iran's nuclear programme. Even if emergency stocks are released because of sanctions on Iran or as some speculators suggest helping Obama's reelection campaign, this will have a temporary impact because the stocks have to be replenished later. At the same time a new report by members of the IMF's internal research team says that there could be a permanent doubling of oil prices in the next 10 years.
Opec countries have increased expenditure because of higher oil prices and they cannot afford to go further down. There may even be calls for prudence in the upcoming meeting of the Opec conference towards the middle of June in Vienna.
The writer was the head of the Energy Studies Department at the Opec Secretariat and is working as an adviser.
