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Former OPEC insider tells how global oil pricing got flipped on its head

By on 3 Apr 2016 in analysis, notable posts
A former Opec insider tells how global oil pricing got flipped on its head

Above, a worker at the West Qurna oilfield in Iraq’s southern province of Basra. Atef Hassan / Reuters

(The National) From 2004 to 2008 and 2010 to 2014, oil production and prices both rose. The price increases were completely divorced from the market principle of a supply-demand balance. In the middle of 2014, the price momentum ran out of steam and prices began sinking in a bog of unconsumed, overproduced, expensive new oil.

That market disorder should have been a reason for concern. Unfortunately, greed suppressed the voices that raised the alarm and warned of the long-term dangers of short-term gains.

Today, the producers who used to be price setters through supply control can produce only what costs less than the market price, which they no longer influence. Things will become normal only when we have the horse back before the cart.

The last quarter of 2015 was a busy touring time for many oil ministers of Opec and other exporters. There were sighs of relief on February 16, when the ministers of Russia, Saudi Arabia, Venezuela and Qatar announced that they had reached agreement in principle on a scheme to reduce oversupply and return to a state of balanced supply and demand. The scheme will now be presented to other producers, including the UAE, on April 17 in Doha.

In the early 1980s, with the price of oil above US$34 per barrel, Opec member countries were producing more than 30 million barrels per day. The commencement of supplies from the North Sea, Alaska and other new basins coincided with the completion of crude oil purchasing by member states of the International Energy Agency for their strategic reserves. The volumes were purchased at a rate of about half a million barrels per day and were wrongly considered by Opec, at the time, as demand increase for consumption and not storage. That masked a big drop in demand. Coupled with the increase in supply from the new fields, this was the beginning of the first major price collapse that Opec had to deal with.

Because of the resulting glut, members could not achieve the prices Opec had […]

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  1. Robert R says:

    Please also consider the impact of the vast quantity of paper barrels trading. In the short term (12 mo?) this can overpower wet fundamentals.

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