The Hindu Business Line : Over-tightening expected in oil market: Barclays

Possibilities
If the OPEC output remains at 30.0-30.5 mb/d, the market will tighten markedly.
OPEC production policy rests on a broader range of considerations that could prompt it to adopt a cautious approach.

G. Chandrashekhar

Mumbai, Aug,16

Will the Organisation of the Petroleum Exporting Countries (OPEC) raise production in the months ahead and avoid a potential supply squeeze as the market moves into the winter season? This is the question agitating minds of a large number of market participants and is a burning topic among energy experts.

Different challenge

The next meeting of OPEC is scheduled for September 11 and speculation is rife as to the possible outcome. Barclays Capital in its research believes the OPEC is not likely to raise production.. Interestingly, while the global financial markets are getting to grips with the bursting of the credit bubble and central banks are acting to avoid a credit squeeze, the oil market is faced with a different, yet a similar challenge. Will OPEC take action to avoid a supply squeeze in the months ahead?

Expert bodies have published forecasts of oil market balances for the last quarter of 2007 and first quarter of 2008; but unfortunately, the spectrum of oil market balances published by the International Energy Agency (IEA), Energy Information Administration(EIA) and OPEC secretariat have wide variations. It ranges from the lowest estimate of 31.2 million barrels per day (mb/d) by the OPEC secretariat to the highest 32.5 md/d by the EIA. Barclays Capital’s own assessment is placed even higher at 33.1 mb/d. These projections suggest that if the OPEC output remains at current levels of 30.0-30.5 mb/d, the market will tighten markedly through the winter season.

OECD inventories

OPEC numbers suggest that if OPEC production stays steady, global stocks could draw by as much as 140-150 mb from October through March. This would be a very large draw relative to historical standards but still short of that recorded last year when the Organisation of Economic Co-operation and Development (OECD) inventories fell by 160 mb over the same period, Barclays pointed out.

If taken in isolation, such estimates would probably make a case for a rise in production levels when OPEC meets next on September 11. But OPEC production policy rests on a broader range of considerations which could prompt the group to assume a more cautious approach, the report argued. Specifically, OPEC’s aim to be in a position to limit price downside, combined with its perception that the current global inventory position is still too high as well as the rising economic uncertainty in the aftermath of the recent financial market turmoil are all tilting the odds towards a rollover in production levels, Barclays argued.

Unequivocal signs

In their own assessment as well as in the balances presented by the IEA and EIA, the combination of a more pronounced seasonal upswing in demand and a lower profile for non-OPEC supply additions point to an acute over-tightening of the market and are sending a much more unequivocal signal of the need for an increase in OPEC output, Barclays claimed.