Monday, May 24, 2004

The ceiling becomes the floor?

The big oil news over the weekend was the juxtaposed meetings of the oil consumers in New York and the oil producers in Amsterdam. The consumers made what the New York Times characterized as an "unusually blunt demand" of the producers to lower oil prices in the interests of "lasting economic prosperity and stability, particularly for developing countries" (considering the G8, the richest countries in the world, issued the statement, the concern for the fate of "developing countries" is a heartwarming touch). The producers -- but for one important exception -- were not swayed by the appeal, at least one stating in respone that "The market is already sufficiently supplied with oil". The one important exception, of course, is Saudi Arabia, which over the weekend unilaterally declared its intention to boost production by up to 11% to meet global demand.

So much for the news wrap-up. What does it all mean? The General already reported that many in the oil biz think up to $8/bar. of current prices are due to speculation and political instability in Iraq. Notably, three countries -- Libya, Venezuela and Iraq -- have publicly stated their confidence in this analysis and its conclusion that production shortfalls are not the current problem. Even if OPEC boosts production (i.e. Saudi Arabia goes to full production capacity), oil prices are unlikely to fall much in that many say OPEC is already exceeding its quotas and a formal pledge to boost official production levels will simply make the de facto situation de jure. And OPEC countries are wary of opening up the spigots for fear it will provoke another big fall in oil prices once speculation and instability are quelled, leaving them holding the bag while the consumers have fun, fun, fun 'till daddy takes the T-Bird away.

A pretty sure bet for the June 3 OPEC meeting in Beirut will be a formal increase in the OPEC price band. Currently at $22-28/barrel, countries such as Nigeria, Venezuela and Indonesia have in the recent past suggested a significant upward revision. Over the weekend both Qatar and Nigeria stated that $28/barrel should be the new price band minimum, effectively turning the old oil ceiling into the new oil floor. If $8/barrel is really froth on the top of supply and demand, a new OPEC price band of $28-32/barrel is entirely likely.


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