OPEC’s New President: “Watch Out, It’s Coming”
Wilson Pastor is Ecuador’s minister for Non-Renewable Natural Resources, and a very capable fellow. We have worked together on the refinery project I advise down there. In capital city Quito, given the country’s declining oil production, prospects for the global market are very important.
Well, Ecuador also happens to be one of the 12 members of OPEC, the Organization of Petroleum Exporting Countries. And Wilson just happens to be OPEC’s new president.
As it celebrates its 50th birthday, the oil cartel is demonstrating some of the strains developing in the oil market. Still, it can sometimes be very subtle in its reading of the oncoming situation.
What Wilson says has an impact on your investment plans in energy.
However, unlike market misgivings in the past, this has less to do with fears that OPEC might cut production, and more to do with what the cartel sees for the global market moving forward.
The main conclusion is pointing in a very different direction…
OPEC’s Next Move Has Gone Unnoticed
Attention is once again focused on the next OPEC meeting – October 14th in Vienna – and the usual uncertainties from TV’s talking heads over whether the cartel will cut production.
The really important move, on the other hand, has gone almost unnoticed.
First, on what will happen at the October session: There is no chance that OPEC will change its production quotas at that meeting, or, for that matter, at the special meeting set to take place in Quito in December. All of its projections point toward the price of crude remaining this year between $75 and $85 a barrel.
And that means it can effectively balance production and return without resorting to market manipulation.
OPEC has left its output ceiling unchanged for almost two years, since announcing a record supply curb of 2.2 million barrels per day in December 2008 to combat lower demand and prices. That is hardly likely to change this time around.
Anyway, OPEC has not actually tried to directly dictate prices for some time. Rather, it relies on careful prognosis of demand levels and then attempts to set its production accordingly.
It estimates what it will pump by first estimating worldwide demand, then forecasting non-OPEC extractions, and, finally, by subtracting the second from the first and establishing what is called the “call on OPEC.” It then determines production quotas for each of the 12 member nations.
Those quotas are voluntary, and overproduction has occurred. However, the countries have learned (sometimes the hard way) that consistently ignoring the quota will risk bringing additional Saudi production into the market as enforcement (as in the mid-1980s), thereby driving down the price.
Compliance is now running at about 53%, indicating that some of the members are still running budget deficits from the depressed prices during the financial crisis and choosing to exceed their production allotments.
OPEC officials are now publicly saying that greater adherence to the quotas is necessary to maintain the organization’s overall position – a clear sign of growing concerns over its members maintaining a common approach.
There are grounds for such concerns. Because the real news has been almost buried.
The Only Way to Meet Returning Demand…
OPEC has quietly increased its overall global demand projection for 2011. And for the first time in three years, it also raised the forecast for its own supply requirements to meet that demand.
With a greater amount of the global daily oil coming from non-OPEC sources, the organization cannot dictate market direction, as it did in the past. Yet controlling 40% of the total still gives it the greatest clout.
The increase may not sound like much at first – 1.2%. But that rise increases expected daily demand worldwide to 86.4 million barrels a day. And the indications are now emerging that, before long, the figure may need to be increased again.
Translation: The cartel sees demand coming back and prices going up.
Now the official line – for example, in a statement last week from General Secretary Abdalla El-Badri – continues to point toward increasing volatility in the market and a price of around $80 a barrel. Yet government contacts in members Kuwait and the United Arab Emirates are privately estimating prices well north of $100 by this time next year. And some at the OPEC Secretariat (their administrative arm at the headquarters in Vienna) are planning for rises more quickly and to higher levels.
The reason is straightforward.
Whether you adopt a figure of $80 or one well in excess of $100, there is now a consensus inside OPEC that overall global demand is returning.
That will drive up the price of oil without OPEC having to do a thing.
Some members, Venezuela and Iran, for example, would like to see that price increase as quickly as possible. Venezuela’s Oil Minister Rafael Ramirez said on September 14th that $100 is now a justified price.
Saudi Arabia, on the other hand, usually takes a more cautious approach. Capital city Riyadh believes that a persistently high price will prompt greater U.S. and European interest in alternative energies and the risk of government intervention in importing countries – both cutting into OPEC sales.
But the force propelling the rise is no longer coming from the developed counties – usually referred to as the OECD states. This is the Organization for Economic Cooperation and Development, set up to counter OPEC, and creator of the Paris-based International Energy Agency (IEA). The demand spike has already returned in Asia and Africa, leading to upward revisions in both OPEC and IEA figures.
OPEC projections now regard the recovery in both North America and Western Europe to have begun, as well. And that means the traditional markets for oil will also be increasing. Wilson advises that the instability in the market will be increasing and the overall price levels along with it.
As a result, he does not see any plans to change OPEC output quotas. The market dynamics will establish a price floor in the current range of $75 to $85 a barrel, with upward pressure moving in going forward.
And that means the strategy we are setting out is square on.
Remember, the rise in futures contracts (the “paper” barrels) will occur in advance of a spike in market prices for the actual crude (the “wet” barrels). (Read about the oil futures bubble: “How the Little Guy Will Fix Oil Futures.”)
The objective now is to position with a portfolio comprised of individual companies in the extracting, field service, and processing segments of several energy components, paralleled by exchange-traded funds (ETFs) and exchange-traded notes (ETNs) reflecting both global prices for oil and other energies, as well as designated wider segments among the producers.
In short, all the forward indicators are pointing toward a rise in prices. The only question is how quickly demand will come back in force.
Wilson Pastor and OPEC are merely the latest market movers to tell us this.