OPEC and the IEA
on August 31, 2007

The war of words between OPEC (the oil producers’ club) and the International Energy Agency (the rich countries energy watchdog), has intensified this week, ahead of the next OPEC Ministerial meeting scheduled for 11 September.
Claude Mandil, director general of the IEA, told Arab Oil and Gas ‘the market has become aware’ that OPEC ‘has set an implicit new objective of keeping prices at or around $70/bbl and that the organisation is trying to defend this level.’ If true, this would be a further significant increase on the presumed previous target of around $50/bbl. In turn, of course, this is a long way from OPEC’s targets of $28-30/bbl a few years ago, or $18-20/bbl a decade ago.
Mandil went on to say that the current price ‘could, as we have often said, weigh on global economic growth. It is from now that the refineries must start working harder to satisfy winter demand. We therefore need more crude oil but, unfortunately, signs from OPEC do not give us much hope of this’. These are strong words, and clearly part of a co-ordinated lobbying campaign, as Mandil’s deputy then went on to tell the Financial Times that ‘$70/bbl was too high and a threat to the world economy’.
However, OPEC’s Secretary General Abdulla el-Badri told Bloomberg ‘there’s enough oil in the market, we don’t know what to do with it. I assure you that if there’s any shortage, we will supply more crude to the market, but I think the market is really stable at this time.’ Putting this comment in context, the Financial Times commented that ‘before the US subprime lending crisis, oil-consuming countries had hoped OPEC would raise production next month’.
OPEC is, of course, haunted by the echoes of its decision in November 1997 to increase oil production just as the Asian financial crisis began to hit demand. This took oil prices down to a $10/bbl low in 1999. They do not want to make the same mistake again. And the fact that the Chinese economy is likely to grow at high rates, at least until after next year’s Olympics’, means that Chinese demand for oil may also rise strongly, irrespective of any problems in the US.
The role of financial speculators also complicates the issue. Hedge funds have been selling oil recently to pay margin calls on their subprime investments, and if this pattern continues, then prices could fall further in the short term, irrespective of the underlying supply/demand balance. As recently as early July, as I commented at the time, hedge funds were still buying crude, and went on to drive it to a $78/bbl peak by early August, from its $51/bbl low in January.
Whatever OPEC and the IEA would like, volatility will continue to be the name of the game in oil markets for the next few months. There are just too many unknowns for consensus to develop.

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  • Biofuelsimon
    August 31, 2007

    It’s going to be interesting to see at what level the oil price has to reach before biofuels become cost-effective replacements in Europe and the US.

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