Since the beginning of the year, crude oil prices have surged, with WTI rising from around $99/b to set an all time high of more than $135/b in May.
Whilst commentators and even US politicians have been directing much anger at OPEC producers, claiming the price spike has been fuelled by insufficient output, the story is more complex than that.
The depreciation of the US dollar has played a fundamental role in price hike. This cannot be ignored, and arguably has precipitated the second major factor driving up the oil price.
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With the dollar collapse the markets have entered what Malcolm Wall Morris, CEO of the Dubai Gold and Commodity exchange (DGCX) has termed a ‘commodity super-cycle’.
Ultimately investors have run scared from currencies and banking stocks, and been driven into the arms of the gold, steel, and oil markets, driving up demand and with it the price. In May’s monthly report OPEC cites this combination as the primary driver behind the current price environment.
“Dollar weakness along with the increased flow of new speculative investments in crude oil futures, has pushed prices further out of line with the levels justified by fundamentals,” reads its opening gambit.
The upward price trend has come despite a number of bearish developments. Forecasts for world oil demand growth this year by major institutions have been revised, down sharply in recent months, OECD commercials stocks remain above the five-year average in both absolute terms and in days of forward cover, and US commercial crude stocks have risen to nine month highs.
Probably with these facts in mind, in his most recent briefing Abdalla Salem El-Badri, OPEC secretary general, appeared to have lost patience with incessant calls to ramp up production.
“There is clearly no shortage of oil in the market. OECD commercial oil stocks remain above the five-year average, with days of forward cover at a comfortable level of more than 53 days. US crude inventories, meanwhile, rose by almost six million barrels last week (mid May), which is a further indication that oil supplies are plentiful,” said El-Badri.
Indeed, he has a point. OPEC member countries continue to produce at more than 32 million barrels a day (mb/d). In addition, a number of new OPEC crude oil projects have started to come on-stream and OPEC spare capacity continues to increase, with the figure currently standing above 3 mb/d.
There are no queues forming at petrol pumps across Europe, the US or Asia, and there is no fleet of empty tankers waiting for crude in either the Gulf of Mexico or the Persian Gulf. Any claims that this is a supply side shock, driven by low OPEC production simply do not tally.
In fact, El Badri went even further in his statement, saying the problem may in fact lie with the stockpiles. “At the same time prices are on the rise, crude oil movements indicate that some OPEC Member Countries are unable to find buyers for their additional supply.”
Given the OPEC figures many producers may be outraged by a recently passed motion in the US House of Representatives authorizing the federal government to sue OPEC in US courts over alleged price fixing, in the latest swipe at the cartel over skyrocketing oil prices. Such illogical posturing is ultimately unhelpful and further damages the credibility of the US in many of the markets it genuinely wants friends in.
Warnings of $200 oil have been given by Goldman Sachs, and echoed by OPEC, but so much of that hangs on the strength of the dollar that once again, supply is unlikely to be the driving force.
No one can be sure of where the market is heading, but the fundamentals of the upstream market suggest a correction seems more likely than a $200 barrel in 2008.
Daniel Canty is the editor of Oil & Gas Middle East.
