Highlights
– Record high prices result in calls for increased OPEC output
– OPEC denies increased oil demand
– Supply and Demand no longer sole determining factor of oil price
– Price to remain near record levels for the near to mid term
With oil prices regularly breaching record highs, future price predictions are scaling as high as US$200 per barrel by the end of 2008. Some analysts blame the rise in price on the Organization of Petroleum Exporting Companies (OPEC) for its refusal to increase output, but OPEC places the blame solely on market speculation and the weak dollar. OPEC President Chakib Khelil told reporters on June 23, 2008 that the cartel would not increase supply unless demand increases, and at this point that increased demand does not exist. In a later interview, Khelil said, “supply and demand was balanced and prices would remain high until year-end due to speculation, developments in the dollar and possible policy decisions by the European central bank.” Subsequently, the cartel maintained output levels in its June 2008, quarterly meeting.
Therefore, with insignificant change in demand, OPEC’s determination to maintain its current output, and interruptions in supply, the price of oil is expected to remain above US$120 per barrel in the near term, likely climbing above US$145 per barrel in the third quarter.
OPEC: The Argument for Maintaining Output
For many OPEC members, such as Iran and Nigeria, oil is the nation’s only major export. For these nations, missing calculating supply and demand ratios that led to a dramatic fall in oil price would be detrimental to their national economies. Though some say there is enough excess demand in China and India to soak up increased output, which would incidentally keep increased output from producing a lower price point, OPEC members are leery.
When considering OPEC members’ apprehension to increasing output, one must remember that today’s increase in output requires nearly three months of processing to reach the market. Given that OPEC analysts blame the increase in crude oil price largely on market speculation and the weak dollar, it follows that, should OPEC announce a large increase in output, market speculators may react by bidding down the price of oil today. Then, when the increased output reaches the market three months later, the market would be over supplied, further decreasing price.
Non-Impact of Past Increases In Output
Market analysts advocating increased output were disappointed when the June 23, 2008 200,000 barrels per day (bpd) increase in Saudi Arabian output failed to have the intended impact on oil price. The fact that 200,000 bpd is only 0.2 percent of global daily demand was a large factor in the production hike’s inability to achieve the desired result. Coinciding unrest in the Niger Delta, Nigeria’s primary oil producing region was another reason prices did not decline.
This scenario is indicative of the fact that the price of oil is no longer simply impacted by supply and demand. Civil unrest, terrorism, and refinery closures often impact oil prices through reducing supply, but prices are also impacted by senior policymakers or terrorists threatening to disrupt supply or forecasting high future oil prices.. Following a comment by OPEC President Khalil that oil price could rise to between US$150 and US$170 per barrel this summer, the spot oil price rose from US$134.55 to US$138.09 per barrel. Similar market responses to US$200 per barrel price threats from Iranian President Mahmoud Ahmedinejad and Venezuelan President Hugo Chavez indicated increased and sustained volatility in the global oil market.
Future Outlook
There is no indication oil prices will decline in the near term. With sustained output levels, undetered demand, and limited refinery capacity, the current supply and demand outlook will remain in place. Likewise, the oil commodity market is likely to remain attractive to investors in the months to come.
The one remaining hope for oil price may be an increase in the value of the United States (US) dollar. The US Federal Reserve voted on June 30, 2008 to maintain current interest rates despite the declining dollar. Those close to the Federal Reserve’s decision indicated that the Federal Reserve’s tone fell somewhere between “bias to do nothing and a bias to tighten rates.” Should the Federal Reserve choose to raise the Federal rate in the third or fourth quarter, the price of oil would likely decline with the rising value of the dollar.
