Real reasons OPEC snubbed production increase

The cartel, against all postulations, refused shift ground from its earlier decision of pumping 27.2 million barrels per day, which started since November 1, 2007 .

Although, countries like Nigeria and Libya were more forthcoming as regards the position of the members when they declared that were against any increment in production quota as there were no situation on ground to justify such increase.

It should be noted that Nigeria all these while, had canvassed for non increase of the current production level, because there was enough supply in the world market. Odein Ajumogobia, minister of state for energy (Petroleum) had stated, for instance, that Nigeria will not support an increase in production quota because consumers have enough crude, and that speculators, a weak dollar and political tension are generally responsible for high prices in the global market.

The sustenance of the current production level, according to him, is to harmonise and forge better close ties existing between the so called high level OPEC members and the smallest producers.

He said the fundamentals of supply and demand of crude do not support an increase of 500,000 barrels per day (bpd) of crude oil into the global market, adding that, the lack of support by these fundamentals contributed to the sharp decline in prices, after almost closing at $100 per barrel. "If there is shortfall in supply, it would be difficult for us to experience a drop of $11 per barrel within a week before the increase of $4 per barrel on Monday". He noted further that the increase in prices, about two to three days to the meeting was a temporary jolt which was expected to decline after the meeting.

In the same vein, Williams Edwards of Edwards Energy Consultants, attributed the surge in prices of crude oil in the last four years to the roles of speculative trading. He noted that OPEC should continue to provide the global market with the necessary volume that would not impact negatively on investment. He commended the organization for responding to high prices with increase in production quota in the past, after examination of necessary variables. "Members of OPEC should continue to play their roles effectively. In the case of consumer nations, they are looking at the situation superficially. If the organization announces an increase in supply of 500,000 bpd, they will see it as a good measure to make more crude oil available. This however would not be favourable to both of them in the long run", he warned.

Paul Cardoso of Pemex Oil , Madrid , supporting Nigeria ’s position pointed out that the energy market is reasonable and well supplied with crude oil. He noted that there was no need to increase supply of crude oil to the international market by OPEC member nations since there were lots of factors that come to play in the determination of high prices of crude oil by OPEC. "There is enough oil in the market and global market itself is not ready for additional supply. Hence, there is no need to increase production capacity", he had suggested.

The energy industry analyst noted that, it would be a wrong decision for OPEC to increase supply because the consequence of such a decision would not be favourable in the next quota. He added that the consequence of such a decision would reduce investment in exploration programme and development of new fields by oil firms as a result of the high contract cost being charged by oil services firms for projects because of existing high crude oil price.

"The best for producers now is to maintain the current production level and not allow pressure from consumer nations to make them take a decision that would bring another setback for investment in the global oil and gas industry", he noted.

However, not a few energy ministers from OPEC member nations who attended the conference refused to comment on the outcome of the meeting. Shokri Ghanem , Libya ’s oil minister had however volunteered that the market is well balanced and does not need anything. Many of the delegates who arrived the Emirates Palace , venue of the meeting in Abu Dhabi agreed that the organization will continue to play its responsible role of ensuring stability in prices which does not necessarily mean that an increase in supply will be the only solution to sustain price below $100 per barrel.

The OPEC ministers however blame an increasing flow of funds from financial markets investing in oil for reducing their ability to control prices.

The expected output increase they noted would not solve the problem of oil prices skirting $100 a barrel, members noted.

Both OPEC and a few international watchers of the market, agree that the thirst for oil from booming developing economies, particularly China and India , has contributed to the unprecedented almost $30 a barrel run-up in oil prices since August.

Daniel Yergin, chairman of Cambridge Energy Research Associates, confirmed this, when he noted that investors’ worries about the weakening power of the US dollar, explains why oil in particular, has been the whipping boy as they readily find it an alibi for pushing up crude prices amid concerns about economic weakness in the United States.

This situation is contrary to the usual pattern in which, instead of the proverbial flight to the dollar in times of economic uncertainty, what is now being witnessed is a flight to oil.

OPEC at the end of its last meeting at Abu Dhabi stated that having reviewed the oil market outlook, including the overall demand/supply projections for the year 2008, in particular, the first and second quarters, the Conference observed that market fundamentals have essentially remained unchanged, with the market continuing to be well supplied and commercial crude/product stocks remaining at comfortable levels in terms of days of forward cover.

The organisation also noted with concern, that world oil prices remained volatile in major parts, due to the perception of market tightness by market players, exacerbated by non-fundamental factors, including the heavy influx of financial funds into commodities and speculative activity in the markets, while geopolitical developments have contributed to price volatility.

There has been no interruption in crude supplies and OECD commercial inventory levels remain above five-year levels. Forward cover, which stands at 53.5 days, is at a comfortable level.

According to the oil wise men, rising oil prices, which are currently being witnessed, are largely being driven by market speculators. Persistent refinery bottlenecks and seasonal maintenance work. Adding that, political tensions, seen in recent days, are also pressurizing oil prices upwards.

In view of the aforementioned, they therefore, decided to leave OPEC production unchanged for the time being. This by implication again, emphasizes the Organization’s determination to take every measure deemed necessary to keep market stability through the maintenance of supply and demand in balance.

Given the need for extreme vigilance in assessing the market during the coming months, it has decided to fix an extraordinary meeting for February 1, 2008 in Vienna , Austria . It has equally confirmed that its next Ordinary Meeting will be hold on March 5, 2008 , in Vienna .

Angola , a new member of the organisation, and returnee Ecuador were both allocated1.9 million and 520,000 barrels per day respectively.