Oil scene: Fuel market confusion

Published March 20th, 2012 - 11:39 GMT
There is no dearth or shortage of crude in the market, everyone agrees
There is no dearth or shortage of crude in the market, everyone agrees

With Brent hovering around $125 and the possibility of it going still further up very much on cards, the energy forum, bringing together virtually all the stake holders under one roof, could not be held at a more appropriate — rather pressing — juncture.

The current crude scenario has the potential to derail growth and push global economy into recession and indeed depression, most agree. Emergency was very much in air at the conference venue in Kuwait. SOS signals were all around. A sense of urgency was felt creeping in.

Something needed to be done — and urgently — to take the bull by horns. Various permutations and combinations, confounding the situation further, appeared on table. Top US officials including Energy Secretary Steven Chu and Treasury Secretary Timothy Geithner have been saying publicly of the possibility of releasing crude from the Strategic Petroleum Reserves (SPR). US President Barack Obama and British Prime Minister David Cameron too discussed the issue during their recent White House meeting. Although, no agreement was reached, the two sides vowed to continue working together on the issue.

Contradictory claims were in air too — if pressure was building on Saudi Arabia and other producers — to open the taps further. One Gulf official told Reuters: “There were talks held between Saudi Arabia and the US and the US asked if Saudi Arabia could be accommodating once the sanctions take effect in July. And the Saudi response was that it was ready to meet demand in the market if required, but would not like to take part in the politics.” However, a person familiar with the Kingdom’s oil policy insisted that the US hasn’t asked for additional Saudi crude supplies from July onward, when international sanctions against Iran take effect. Washington too was not ready to confirm or deny any such ongoing discussion. US Energy Secretary Steven Chu said in Washington last week that the US typically holds talks with producers to replace output lost through unplanned disruptions. “We do have discussions with various countries on things like that,” Chu said without directly saying if the US had requested for additional oil from Saudi Arabia. “We do engage with countries in terms of, should there be interruptions to supply, should there be things of that nature, that countries with some spare capacity then could meet world demands.” Another US official too declined to comment on the talks, insisting instead: “We consult regularly with the Saudis on a range of bilateral and global energy issues.” However, signs of growing Saudi shipments to the US seem to be coming.

Latest reports are indicating that shipments to the US rising to the highest level since mid-2008. And the trend is set to continue. Vela, the Saudi state oil tanker company, has reportedly booked at least 9 very large crude carriers (VLCCs) capable of carrying 2 million barrels of crude each from the Middle East-Gulf to the US since the beginning of March, the biggest such wave of fixtures in years, analysts underline. And with Riyadh, the energy world in Kuwait too was attentive to what it had to say on the emerging scenario. Availing the opportunity, Petroleum and Mineral Resources Minister Ali Al-Naimi reiterated that Saudi Arabia and other oil exporters are ready to offset any shortfalls in supply. “Saudi Arabia stands ready to fill any oil supply gap — “perceived or real” — as oil prices rally on fears of a potential loss of Iranian output.

Today, the oil market is generally balanced and there is ample production and refining capacity ... Saudi Arabia and others remain poised to make good any shortfalls — perceived or real - in crude oil supply,” Al-Naimi insisted. On the issue of volatility, he was to the point: “Volatility is bad for the consumer, bad for producers and bad for the sort of long-term planning required in the energy business. Market volatility is not in the interest of anyone present here today.” Rising prices, despite strong fundamentals, have brought the issue of speculation to the fore — once again. “But, ultimately, volatility is caused by speculation in the marketplace, based on conjecture over tighter supply-demand balances in the future, and increased interest in energy commodities as an asset class for financial investors. It is this emphasis on ‘paper barrels,’ rather than actual cargoes, which creates problems,” Al-Naimi added. Indeed the minister had ample reasons for emphasizing upon the role of speculation. Prices are going up despite ample supplies.

There is no dearth or shortage of crude in the market, everyone agrees. OPEC’s crude production has been rising steadily, creeping up to the highest point in more than three years, the International Energy Agency too conceded in its monthly oil report. The 12 members of the Organization of Petroleum Exporting Countries produced 31.42 million barrels a day last month, the most since October 2008, IEA monthly oil report said. That compares with a revised 31.11 million in January and exceeds the group’s 30 million output ceiling set at its December meeting. The IEA’s production figure differs from OPEC’s own estimate of 30.97 million in its monthly report on March 9, which is based on secondary sources. As per the IEA, Saudi Arabia was pumping at an almost three-decade peak of 10 million barrels a day last month, up from 9.85 million in January. OPEC’s “effective” spare capacity was still estimated at 2.75 million barrels a day last month, versus 2.85 million in January, the IEA said. That figure excludes Nigeria, Iraq, Venezuela and Libya.

The forum also provided Iran with an opportunity to present its case before an attentive global audience. Oil minister Rostam Ghasemi blasted the policies of “unilateral economic constraints” — a reference to sanctions — that he claimed “jeopardizes free trade and continuity of oil supply in the world,” adding “energy security may not be achieved through interference in the domestic affairs of countries.” Ghasemi also claimed that “unreasonable measures” would raise costs for governments pursuing them and bolster Iran’s oil revenue. “The prices are good and we don’t think we will make less. The world is large enough and it is full of customers,” the Iranian oil minister said, when asked what would happen to supplies previously sold to the EU. Qasemi also insisted Iran would produce as much as the market needs and that the country hadn’t reduced its output or exports. The IEA, however, reported that as much as 1 million barrels a day of Iranian exports might be lost to sanctions. Not much time seems left. The world appeared in a hurry last week in Kuwait, eager to gear up to the emerging challenges — mostly of its own making!

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