Security Fears Keep Oil Prices at High Levels
Walid Khadduri Al-Hayat - 30/09/07//
The price of US light crude dropped to $78 a barrel this week, compared with its recent record level of $84.10. However, despite the rise in the US crude oil reserve, prices returned to rise to $85 at the end of the week, with the prospect of a new storm threatening the Mexican coast.
OPEC is trying to limit the price rise to $80; its secretary general, Abdullah al-Badri, stated after the organization's recent ministerial meeting that "the price of $80 is high and is not supported by the foundations of the market." This means that OPEC is uncomfortable with this high price, and there is fear that the continuing price rise will lead to new record levels every week or so. This will produce a reduction, sooner or later, in world consumption of crude oil, and an increase in the use of alternative fuels, not to speak of the negative impact on the economies of the world, and especially those of the developing countries.
A commotion erupted in markets after the OPEC meeting in Vienna last September, as some analysts claimed that a rise of 500,000 barrels a day is the minimum the markets expected, although everything said by OPEC ministers and the secretariat-general of the organization prior to the meeting was about the absolute non-increase in production.
At the same time, OPEC is forced to be wary of any un-planned increase in production, in view of the unclear nature of the international economy in the near future, due to the repercussions of the mortgage lending crisis in the US on the American and international economies, and the possibility of a sudden drop in demand for oil, followed by the collapse of prices to record low levels.
Also confusing the markets is that the increase was unable to halt the price increase after the meeting, although the ministerial decision stipulated an increase in production beginning 1 November and not immediately. The reason for setting a date was an attempt to provide additional supplies for the winter, when demand rises.
However, despite the OPEC decision and in view of the sudden and unnatural rise in prices, preliminary information in the tanker sector indicates a real rise in OPEC exports this month. This is expected, under the current conditions; oil countries try to benefit from price rises by increasing production and meeting the needs of companies outside the scope of their contracts.
What helped this temporary price rise was that important events took place in the markets at the time, most importantly the increasingly-violent season of storms in the Atlantic Ocean and the Gulf of Mexico, which affects the movement of tankers to oil ports in the southeastern US. More importantly, large quantities of production and American and Mexican refinery operations for a period of time, estimated at 800,000 barrels a day from the Gulf of Mexico, in addition to 2.4 billion cubic meters of natural gas.
However, Royal Dutch Shell, the biggest company operating in the Gulf of Mexico, along with BP, evacuated their workers and employees, and closed their facilities in maritime areas in anticipation of possible damage from the storm. However, they quickly returned to work, taking advantage of what they learned from the Katrina experience in 2005 about reducing these kinds of losses.
This temporary but large halt in production was accompanied by the appearance of a new security and political problem, represented by the destruction by leftist revolutionaries in Mexico of oil and gas pipelines in that country. In addition, there has been a halt in the production of huge quantities of oil by Nigeria for a long period of time, reaching nearly one-third of the country's capacity, due to sabotage carried out by the Niger Delta Liberation Movement.
These events coincided with a drop in the US crude oil commercial reserve for four straight weeks, even though it remains the average level of the last five years. This has spurred fears by consumers that the commercial level should rise, not fall, before the onset of winter.
However, despite these short-term developments, the principal element that has caused anxiety to those working in the markets for some time, and which is pushing oil prices to high levels despite the precise balance in current supply and demand, is the possibility of a military strike on Iran and its repercussions for oil supplies from the Gulf.
The level of western statements and threats has risen recently, especially by the new French administration, in addition to the strengthening of bilateral sanctions, particularly American ones, on commercial companies affiliated with Iran's Revolutionary Guards and the foreign firms dealing with them. These developments have had an impact on markets, worried about the repercussions of a big military action for the Middle East in general and oil supplies in particular.
The message was clear at the OPEC conference, as the organization doesn't want prices to go above $80 a barrel. Meanwhile, a sudden rise for a short period of time doesn't mean that OPEC has given up on this goal. In fact, without seeing a media commotion, we have seen the provision of additional supplies to compensate for any sudden shortfall, and end the phenomenon of record prices that don't reflect the fundamental supply and demand in the markets.
*Dr Wakid Khadduri is an expert in energy affairs
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