Economists and oil analysts have said that OPEC production cuts are beginning to have an effect in contracting the market and as a result expect prices to rise later this year.Â
The cuts, which were first introduced last September, allowed the price of oil to stabilise at around US$40 a barrel while providing a firm platform for the price to rise to its current level of just over $50 a barrel.
Speaking at an industry conference, Ed Morse, managing director of LCM Commodities, said: “It is inevitable that the oil market will tighten this year. The only question is when,”
The 12 member states of OPEC have all been keen to see the price of oil rise, especially as most of the countries set 2009 budgets on the back of $100+ oil prices.
The Organisation decided to cut oil production by 4.2 million barrels per day (bpd) since last September and it is widely believed that this target will soon be met. It is thought that 80% of this figure has been already implemented, leaving between 800,00 to 900,000 bpd yet to be cut.
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Other factors thought to have helped the oil price stabilise from prices below the 30 mark in December are the weak dollar and a colder-than-usual winter in major market.
Richard Jones, IEA deputy executive director believes if there is full compliance to the production cuts by OPEC it will remove a significant amount of oil from the market.
“Such a cut would likely tighten the market substantially by June. This could provide further support for prices,” he said.
“The market has likely only paused to catch its breath rather than moved into a prolonged period of lower prices.”
Jones also pointed to a probable increase in demand for oil from markets in the Middle East and Asia.
“We expect demand to recover and not before too much longer, even if the growth is likely to be lower than in the previous decade,” he said.
The analysts do not expect the prices to return to the $100+Â levels they enjoyed in 2008. Morse identified Saudi Arabia as the key producer for OPEC.
“The Saudis seem willing to protect $40 and to limit price increases to $50-55 in the short-term, aiming ultimately for $75 a barrel,” he said.
When answering a reporters question Morse added:Â “I think $40 to $75 per barrel is sustainable.”
Morse’s comments are backed by by the Saudi Oil Minister Ali al-Naimi. The official recently complained about the current low prices and set a medium term target of between $70-$75 a barrel.
Jones also said that the IEA shared OPEC’s concerns that the fall in oil prices would limit future investment in oil oil production which could send future energy prices soaring.
“Many, including ourselves, are concerned about the potential supply response when demand begins to recover,” he said.
“Without continued investment, baseload production will inevitably decline over time and the longer this goes on the more difficult it will be for supply to respond to future increases in demand. It is literally ‘use it or lose it’.”
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