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Oil in a Week – On the New Levels of Oil Prices
Published in AL HAYAT on 14 - 11 - 2010

Crude oil prices have recently risen, with the average U.S. Light Crude oil price hovering between 85 and 87 dollars per barrel, compared to 75 to 79 dollars per barrel in September and October.
The reason behind this rise can be explained by many factors, such as the decline in the value of the dollar against other currencies, the levels of the U.S. commercial oil inventories (which are indicative of rising consumption), and the increased demand for oil in China, due to improved economic performance and the start of strategic oil storage (with an average addition of 1.2 million barrels per day or nearly the equivalent of Spain's consumption of oil). This is in addition to improved oil demand fundamentals, in tandem with the improvement of the global economy.
Two weeks ago, oil prices were continuously rising on a daily basis. There were many statements issued by OPEC officials indicating that prices may reach the level of 90 dollars (such a price level would not harm global economic recovery in the aftermath of the global financial crisis.)
These statements show that OPEC will deal carefully with price hikes, should they continue to rise within reasonable limits, and not soar beyond control to very high levels, especially if this takes place as a result of manipulation by speculators and investors seeking to benefit from this hike in prices. OPEC's objective is clear: to assist Member States in securing just revenues for their oil exports, and to promote global economic stability.
This increase in prices is taking place amid many tides surrounding OPEC. On the one hand, there is the increased demand for oil following the global financial crisis, especially in the countries of the OECD (Western industrialized nations), in addition to the ongoing increasing demand in emerging countries such as China, India, South Korea and Brazil. This is not to mention increased hydrocarbon consumption in the oil-producing Middle Eastern countries themselves.
In truth, global demand for oil rose from nearly 85 million barrels per day shortly before the onset of the crisis, to about 86.94 million barrels per day this year. According to forecasts by the International Energy Agency (IEA), oil demand levels will continue to increase in 2011 to approximately 88.16 million barrels per day. These increases come after a slump in demand of nearly 560,000 barrels per day in 2008, and around 1.16 million barrels per day in 2009.
But what do these figures mean? They in fact demonstrate that OPEC has succeeded in overcoming the global financial crisis, driving price levels to the desired range. This success has required the cooperation of the organization member states in cutting production in parallel with the decline of worldwide demand for oil. The Kingdom of Saudi Arabia bore the brunt of production cuts, as its production capacity decreased to approximately 8 million barrels per day, while its actual capacity amounts to nearly 12.5 million barrels per day. In other words, Saudi Arabia withheld surplus production capacity of nearly 4.5 million barrels per day. Kuwait and the United Arab Emirates have also taken part in adhering to their prescribed quotas, leading to an increase in the overall surplus production capacity of the organization members.
These high surplus production capacities had usually led to lower prices in the past. However, the consistency of OPEC members' policies and their adherence to the decisions taken by the organization ministers have both given its decisions a great deal of credibility, prompting the markets to respect such decisions and factor them in their calculations, while not speculating against them. Also, these decisions were taken with the economics of markets in mind, away from political disputes among certain member states, especially those that affect the stability of oil-producing Middle Easter countries. OPEC has thus managed, rather commendably, to keep off these disputes from its deliberations, and to focus instead on market-related factors, in a manner that best reflects the supreme economic interests of all member states, namely, to secure reasonable financial revenues.
However, an important question posed by the public and consumers remains: Will prices increase to the level of 100 dollars in the foreseeable future? The fundamentals of supply and demand do not point toward this. This is because there is, at present, a surplus production capacity that is sufficient to meet possible worldwide annual demand growth, should the levels of the increases in demand mentioned above continue. In the absence of a major political crisis in the Middle East, and should speculation by investors be kept in check, current data suggests that oil prices might remain in their present range until further notice, in light of the sufficient surplus production capacity.
*. Mr. Khadduri is an energy expert


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