Opec members must keep pledges

A month ago, I said that if Opec (Organisation of the Petroleum Exporting Countries) is satisfied with the prevailing prices in April, it needs do nothing in its end of May meeting. Sure enough the meeting ended on Thursday May 28 with Opec maintaining its production level for 11 member countries (excluding Iraq) at close to 24.9 million barrels a day (mb/d). The press release coming out of the meeting reiterated member countries commitment to their individual production levels, which is yet to be realised in reality.

Therefore the meeting was almost like a social occasion for the ministers to greet each other and to enjoy Vienna at this time of the year. The reason for all this is the actual performance of the oil market during the month of May where the average price for the Opec basket of crudes at the end of April was close to $49 per barrel (Dh179.9) and the month's average was even higher at $50.2 per barrel.

Prices continued to improve throughout May though with some ups and downs here and there but the trend was generally upward. Even on the eve of the Opec meeting, prices improved to $60.75 per barrel though all expectations were focused on Opec not to cut production further. The market went further up to $61.77 per barrel after the meeting and West Texas Intermediate crude touched $65 per barrel the same time. The decision therefore was very much expected and the market was moving regardless.

The performance in May was still driven by Opec production cuts though some slippage compared to April was evident. Similarly there is a widely spread expectation that the recession has bottomed out and it could be on its way out sooner than previously expected. If the stock markets rallies are a barometer of expectations, then they have helped to improve oil prices indirectly by their own improvement in recent weeks.

However, there are still some baffling signs in this market. Both the Opec Secretariat and IEA (International Energy Agency) have announced further reductions of 0.2 mb/d in their forecast of 2009 oil demand due to a downward revision of economic growth expectations. They still differ in their supply expectations but not so much as to make a big difference.

The stock levels around the world are unprecedented and very high compared with historical records or trends. All these fundamentals are in fact against the appreciation of oil prices to the current level and therefore, we may have to recognise that there is a dissociation from fundamentals and that we should not be carried away with expectations.

This is not to say that there is no room for further price improvement especially that we are about to leave the low-demand season in the second quarter and approach somewhat higher demand in the third and fourth quarters of 2009. Prices could indeed reach the much desired level of $70/b to $80/b by the fourth quarter of the year and if they do so by themselves, then Opec has done its job right by not forcing a quicker rise than necessary.

One has to remember that the world economy is not yet out of the woods and it is the duty of every responsible organisation and government not to aggravate the green shoots that are beginning to appear here and there.

My humble explanation to this price environment is that this price improvement could also be some kind of a technical correction because I believe that the price fall in the second half of 2008 was too fast and too large for comfort. It has led to many cancellations or slowdowns in many energy-related projects.

The IEA is forecasting a $100 billion decline in oil-related investment in 2009 as compared to the already low figure of 2008.

This may suggest that governments and companies, producers and consumers are rethinking a position they could live with to restart some investment for future supplies and at the same time not to encumber the much desired path out of the economic recession.

It is indeed prudent for Opec not to reduce its official production ceiling further but at the same time it is important for member countries to adhere to their allocated levels of production in order to ease the overhang of the stocks which remain a real threat to the market.

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