Optimism sustains oil markets

Optimism is proving to be stronger than pessimism in the oil market. In spite of all the downward pressure on oil prices, the average price of an Opec basket of crude recovered, at the end of September, some of the losses incurred in the days before the end of the month on $65.55 (Dh240.7) per barrel as the US benchmark WTI went over $70 per barrel.

The average basket price for the month was $67.17 per barrel, admittedly less than the August average of $71.35 but equally over the July average of $64.59. Therefore, one can say, to the satisfaction of producers, that the range of $65 to $75 is holding and that the average price during the third quarter of the year of $67.73 is much higher than that of the second quarter of $58.51 per barrel.

Price movements in the last three months prove there is not much change in the market as it struggles to find direction amid weak fundamentals and a long awaited recovery.

Both Opec and International Energy Agency (IEA), in their respective September oil market reports, increased their demand estimate for 2009 and forecasts for 2010. This gave some support to the market although this was somehow overshadowed by doubts about the economic recovery.

Although estimates of economic growth are now much better than few months ago, Opec is still expecting a negative growth of 1.2 per cent for 2009 and a positive growth of 2.5 per cent for 2010. The IEA's figures are do not differ much. The IMF however, expects growth to be much higher at three per cent in 2010.

While the market is affected by these estimates it is usually more affected by the daily reports of individual indicators which, more often than not, are either contradictory or moving in opposite directions.

While people are still afraid of a possible disappointment looking at consumer confidence and employment indicators for instance, they are still hopeful when considering housing sales, stock rallies, manufacturing indicators and the G20 promise to continue with the stimulus packages until recovery is established.

It looks that oil markets will continue to be hesitant until solid indications of recovery are established - a task more easily said than done.

The non-fundamental factors did not give much support to prices in September either. Nigerian production is fluctuating due to the violence targeting the industry there.

The problems with the Iranian nuclear issues are hardly affecting the market by more than a ripple while they used to move it by leaps and bounds in the past. It is possible that the current price took into consideration these factors.

Otherwise, how else can one explain the threats of sanctions, military action, and plans to close the Hormoz strait without a $10 per barrel jump in oil prices?

It is unfortunate that the oil market did not get much support in September from the Opec conference, which met on the 12th of the month in Vienna. There was hardly any statement to buoy the prices. In fact they were almost happy with the level of prices only to see them decline so much after the meeting and in the second half of the month.

Although Opec rolled over its production ceiling and member's allocations as expected, the conference communiqué did not even ask member countries to abide by their respective production allocation as the overall compliance fell to 68 per cent.

Countries like Iran and Angola are totally unconcerned about compliance and Venezuela is at 44 per cent compliance only. While Opec is concerned about the level of oil stocks around the world, it is producing some 1.2 million barrels per day over and above its agreed production ceiling and there is no advantage in complaining about Russia's production increase in the last few months.

Opec may rightly be disappointed about the behaviour of non-Opec producers and their refusal to share the burden of price support but this is not a new problem as these countries have always given meagre support to Opec or none at all. The organisation has to accept its fate and raison d'être of supporting price stability in the market.

Given the above, the fears of a price correction - which has been persistent for few months - are still existent. Fears of a correction may be more justified if the distillate market does not find support from the approaching cold season .

However, oil prices and market movements will probably be more or less the same, with a bit of luck.

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