In the pipeline: Good fortunes continue in the oil market

The fear of oil price correction anticipated for the last few months is now mute as analysts and market observers have been proven consistently wrong and oil traded in more or less the same range of $70 (Dh257) to $80 per barrel.

The price of the Opec basket of twelve crudes traded between $75 and $78 per barrel for the whole month of November, suggesting relative stability in comparison with previous months. The average price could be close to $76.4 per barrel as compared to $72.7 per barrel in October.

The price was supported by "the growing expectations of economic recovery" according to the International Energy Agency (IEA), and very high-profile news from China, the second largest oil consumer after the US.

The Chinese auto sector sold 7.2 million cars in the first nine months of 2009 or 42 per cent more than in the same period of 2008. The October numbers are staggering as 946,000 cars were sold, or 75 per cent more than the same period last year.

China's October oil demand rose 10.3 per cent, the seventh monthly rise in a row, and its imports rose by 19.7 per cent from a year earlier. No wonder the Chinese are trotting the globe in search of future supplies.

Other positive influences in the market came from consecutive growth of the US manufacturing sector in the last three months while the Federal Reserve is keeping interest rates near zero for an "extended period". This has prompted housing sales to rise by 10 per cent in October.

Demand for export

At the same time German industrial output in September rose by 2.7 per cent due to improving demand for export.

There is of course the speculation factor in the market where more funds are flowing into commodities, especially oil, encouraged by the continued contango and the promise of higher prices in the coming months in addition to the dollar exchange rate.

While both Opec and the IEA have slightly adjusted their oil demand estimate and forecast upward, it is surprising that the difference in the forecasts of both organisations is still large.

In 2010, Opec is expecting a demand increase of 0.8 million barrels a day (mb/d) while the IEA is forecasting 1.35 mb/d, all from a demand of 84.8 mb/d in 2009. However, both organisations agree that the call on Opec oil is expected to be 28.7 and 28.5 mb/d in 2009 and 2010 respectively.

Opec will certainly welcome the demand growth but should stay cognisant of supply increases from outside the organisation. Russian production in October went over 10 mb/d, an all time record and non-Opec production is forecast to grow further in 2010, hence the decline in the call for Opec oil.

The stocks situation is unlikely to give much support as stocks are still very high above the average of the last five years with over 80 million barrels of distillate stocks stored in floating tankers around the world.

It is almost possible now to tell that an appreciation of the oil price in a day means a decline in the exchange rate of the US dollar and vice versa. Doesn't this exonerate Opec when it agreed with the international oil companies in the early 1970s to adjust the price according to the movement of the dollar against a basket of currencies?

I still think we may be a long way away from pricing oil differently by replacing the dollar with another currency or a basket, but if the dollar continues its decline against other currencies we should expect the cries for change to become much louder.

Opec meeting

Given the evolution of the oil market in the last few months, what should one expect from the next Opec meeting in December in Angola?

While Opec ministers may be happy with the level of prices, they will be reminded that the level of oil demand is at that of 2005 and that the economic recovery is still not as strong as desired.

There should be no change in the level of Opec production. The market is well supplied even if Opec tries to tighten the slipping compliance in its agreed individual members' allocated production levels.

The price range is within what most ministers have often desired to assure future supplies and market stability. All these points could be enhanced by a reassuring statement from the conference meeting in Angola.

Therefore, I tend to agree with what Opec said in its last monthly Oil Market Report: "[Oil] prices are likely to remain in the high $70 per barrel in the near future with price direction continuing to be impacted by economic data and US dollar fluctuation".

The author is former head of the Energy Studies Department at the Opec Secretariat in Vienna.