Recent shifts in the oil market have driven the Saudis to want to cool things with a 500,000 barrel a day increase. So far, it hasn't worked.
by Stanley Reed - Business Week
Until just before the Sept. 11 OPEC meeting in Vienna, virtually every prognosticator, including the OPEC chiefs themselves, tended to rule out any increase in oil production. So why did OPEC announce a 500,000 barrel a day increase beginning Nov. 1? The answer, analysts say, is that a recent, dramatic shift in the dynamics of the oil market alarmed Saudi Arabia, OPEC's de facto leader. At the same time, the Saudis recognized that credit jitters were threatening the economies of their customers. So, they persuaded their colleagues at least to make a gesture to try to cool things down.
So far, it hasn't worked. On Sept. 12, U.S. light crude for October delivery briefly pushed above $80 a barrel, before closing at a record high of $79.91. Shares in oil majors such as Exxon Mobil (XOM), Chevron (CVX), and Total (TOT) traded up nearly 3% since Sept. 11.
Oil Futures Curve Flipped
Contrary to what many people may believe, the Saudis think about a lot more than just keeping current prices high. They have a huge chunk of the world's oil reserves and want to encourage their customers to keep up their oil habit for decades more. They also don't want to exacerbate the current problems with the world economy—or even to be seen as contributing to them. Indications are that the Saudis would have liked to signal an even higher output hike, but in the face of opposition from perennial hardliners such as the Venezuelans, they settled for what they could get a consensus on. What specifically spooked the Saudis was the recent flipping over of the oil futures curve into what is called 'backwardation,' which means that near-term futures prices are higher (in this case much higher) than at the back end several years away. The NYMEX front-month contract for October delivery is at about $79 per barrel, while prices for oil five years out are around $70 per barrel. Three months ago the curve was in what is called 'contango,' with prices higher for contracts two years and out than for those in the front month. OPEC even referred to this shift, which is considered inflationary for prices because it spurs people to buy the most current futures, in its communiqué.
Losing Control to Speculators?
With backwardation, speculators can make money hand-over-fist by buying oil at the front end and then rolling over into cheaper oil as contracts expire, explains Roger Diwan, an analyst at Washington consultants PFC Energy. That can lead to the current price spiraling out of control. "Once it starts, it is bad news," Diwan says. "The only way you can break it is by building stocks."
One of OPEC's biggest bugaboos is losing control of prices to hedge funds and other speculators that they view collectively as upstarts. OPEC thinks that by buying in the front end, speculators distort the market and create the impression that OPEC is holding customers at ransom when, in OPEC's view, the cartel is supplying what should be a sufficient quantity of oil.
In its councils in the hotels of Vienna, OPEC fretted that there was a danger of a politically and economically damaging price spike that would make the economic jitters even worse. Remember, this is still hurricane season, and some people in important positions in Washington are seriously considering a military attack on Iran, the second largest OPEC producer.
(entire article @ link below)
http://www.businessweek.com/globalbiz/content/sep2007/gb20070912_927013.htm?chan=globalbiz_europe+index+page_top+storiesWhy Oil Could Be Headed Even Higher
Strong global demand and tight supply will buoy prices for the foreseeable future, analysts say
http://www.businessweek.com/bwdaily/dnflash/content/aug2007/db2007082_028410.htm
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