Opec ministers divided: fundamentals, or a bubble?

Opec ministers rarely agree on anything, other than they like high, not low oil prices, Oil reporters, analysts and industry executives in Vienna for the cartel’s meeting usually spend quite a lot of time – and
coffees – pondering the latest disagreement.

But even for the cartel’s standards of division, today’s meeting has seen a more profound split than usual on what force is behind the large rise in oil prices above $60 a barrel from February’s four-year low of
$32.70 a barrel.

The ministers are divided into two camps on the issue: the “fundamentals” and the speculative “bubble”.

Ali Naimi, Saudi oil minister and Opec’s de facto leader, believes that fundamentals of supply and demand are mostly behind the price rise and, probably because of his firmly belief that better times are around the
corner, has exhibited a particular good humour since he arrived to Vienna on Tuesday.

“You notice there is a lot of optimism in what I say because I am seeing the recovery. That’s very important,” he told reporters accompanying him in his morning jog.

“The price rise is a function of optimism that better things are coming in the future,” Mr Naimi said, adding that customers were already demanding more oil from the kingdom. Saudi Arabia has so far refused to
pump more. Mr Naimi conceded, nevertheless, that the rise was not all “purely fundamental”, suggesting that speculative money was also a factor driving prices.

Speculative money is exactly what Chakib Khelil, Algeria’s oil minister – an influential voice in Opec and a former senior World Bank official – thinks is behind the price increase, in sharp contrast with Mr Naimi.

The Oil markets may be in a “bubble” because prices are higher than fundamentals would indicate, Mr Khelil said arriving in Vienna.

The Algerian minister is not alone. Abdullah al Attiyah, Qatar oil minister, also thinks something is wrong. “This price of oil now is functional but not related to demand and supply. We should not be too optimistic,” he said.

Abdalla Salem El-Badri, Opec’s secretary general, agrees with the speculator’s camp. “It is not the fundamentals behind the oil price rise,” he said, warning that it was “sentiment” in spite of weak demand
and high inventories what was propelling oil prices.

Opec’s own economists also see the price recovery as shaky, “due more to market sentiment than fundamentals”, and are urging caution to the ministers. “Considerable risks remain as oil market fundamentals are far from balanced due to the persistent contraction in demand and growing supply overhang,” Opec’s economist said.

Opec ministers, nonetheless, did agree in a point: whatever is behind the rise in prices, it is more than welcome. Oil at $60 a barrel looks a lot better than at $30 a barrel.

Related stories:

Opec set to leave output unchanged (FT, 28/05/09)
Opec: Oil at $75 – $80 is okay, says Naimi (FT Energy Source, 27/05/09)