The New World Oil Market
New features have emerged and transformed the physiognomy of the world petroleum market in this first half of the year 2000.
The first is that the USA has behaved publicly and without any inhibition as a member of the oil producing countries’ club. The USA is, of course, a non-signed up member who nevertheless has considerable weight. The Secretary of Energy engaged in a high profile exercise of shuttle diplomacy in February and March, visiting ministers of oil exporting countries, most of them OPEC members but as importantly Mexico and Norway, arguing the need for a significant increase in oil production. Rather remarkably, Mr Richardson went as far as to phone some OPEC ministers on their mobiles during a committee meeting in Vienna in March. In these days of modern communication technology one need not attend a meeting physically since telephone conferences can be arranged. More recently, the US government persuaded a reluctant Saudi Arabia to announce an intention to increase production by 500,000b/day in order to bring oil prices down to the more moderate level of $25 per barrel.
The new phenomenon is not US intervention, but its bluntness and its high visibility.
The second development of high significance is that the notional oil price that is now talked about as reflecting a reasonable, or `comfortable’, level is no longer the famous $18 per barrel which ruled throughout 1987 to 1999, but $25 per barrel. There has been a radical change in the mindset about prices. This does not mean that the market will always deliver $25 for a barrel of oil. It will not. But the market will continually assess price movements, and judge their deviations, by referring to this notional $25 per barrel. And whenever the view that the deviation has become too large begins to prevail, powerful forces will attempt to move prices closer to the norm. We may have entered a new episode in the matter of oil prices: a $mid-twenty oil price which now supersedes the very long $18 episode.
The third feature is the very large price variations that have obtained on two or three occasions, over fairly short periods, this year. Thus, the WTI price on the NYMEX fell from a peak of $34.13 per barrel on 7 March 2000 to $23.85 per barrel on 10 April .The period over which the oil price change was a very significant $10 per barrel was slightly longer than four weeks. To put things in perspective, the dramatic price fall of Jan1998-February 1999, which was also of the order of $10 per barrel (albeit from a lower level), obtained over a long period of eleven months. And between 10 April and 13 June 2000, the oil price increased by about $9 per barrel, a significant shift considering that the period considered was only four-weeks long.
The fourth feature is that the volume of surplus capacity available at present to OPEC countries is very heavily concentrated in Saudi Arabia. This has occurred in the past on a number of occasions, but had not been not a feature of the market in most of the 1990s when there was potential for rapid production increases, not only in Saudi Arabia, Kuwait and Abu Dhabi, but also in Venezuela and Iraq. The current situation bestows considerable power on Saudi Arabia. One should hope that wisdom will always prevail over the temptations that power induces.
A final development which is partly responsible for the recent behaviour of crude oil prices ( they rose above the $30 per barrel mark and remained stubbornly at high levels) is the emergence of a rigidity in the petroleum products trade. Tough environmental specifications which became applicable in some US states on 1 May 2000, and in some others on 1 June, have limited the scope for imports from Europe and elsewhere to relieve a product shortage in the USA. This shortage is due to reduced levels of refinery utilisation in America in January and February. This would have caused no serious problem in the past when product specifications were more homogenous.
The implications of all that are as follows:
- The volatility of the world petroleum market today is a very serious issue that needs to be addressed by the main players.
- The increase in crude oil production demanded by the US government is no solution to the current price problem because Saudi Arabia, Kuwait, Venezuela and Mexico, the countries that may produce more, can only supply sour crudes. What is demanded today is an additional supply of sweet crudes. There is no surplus production capacity for low sulphur oil.
- The performance of the market would improve significantly if:
- (a) The USA refrained from throwing its weight about;
(b) The US and the UK regulators took a less a benign view of squeezes that regularly mar the behaviour of informal markets;
(c) Serious efforts were made by producing countries, oil companies and the IEA to improve the quality of the information on which traders rely;
(d) OPEC, instead of attempting to guess the market through a process requiring a consensus among members, tested its responses through either the price band mechanism or a yet-to be designed alternative policy.