September 11, 2007
Opec acts, the world asks for more
So we have the answers to the questions we posed during the day, here and here.
Opec did raise production, suprising some, but not anyone who listened to PFC Energy last week. (FT stories may require a subscription). And the 500,000 barrel a day increase was from current production of about 26.75m b/d, not the officially agreed level of 25.85m set at Abuja last December.
However, the International Energy Agency, which tries to do for oil consumers what Opec does for the producers, described the move as "a smaller increase than we would have liked," even if it was more than anyone would have expected a few weeks ago. And the reaction in the markets has been to push US crude up by about 80 cents, as of mid-afternoon New York time.
One factor in the market reaction may be the type of crude that Opec will be adding to the market. Its oil is sour - ie higher in sulphur - so it needs more refining to be turned into usable products, and in the US in particular, refinery capacity is in short supply. So the effect of today’s announcement for US light sweet crude prices - the West Texas Intermediate benchmark, for example - may be limited.
If the world stays out of recession, and oil demand holds up, expect the same pressure on Opec for another move at the next ministerial meeting, in Abu Dhabi on December 5, or even earlier, at the Opec summit in Riyadh on November 17-18.
Does anyone know if the world has enough spare sour crude refining capacity for the new OPEC crude to result in increased useable supply?
Posted by: Jim Kingsdale | September 12th, 2007 at 4:01 pm | Report this commentBy now, we have an answer, which is: up to a point. Spreads between WTI sweet crude and the Opec basket have widened, suggesting that there is some tightness in refining capacity for the extra crude that will come on the market in three weeks’ time. Overall, though, refining capacity seems much less in short supply than it was. Margins in the US and Europe have collapsed from their very high levels in the second quarter.
Posted by: Ed Crooks | October 9th, 2007 at 12:24 am | Report this commentA bigger consideration in the crude market seems to have been that a mere 500,000 b/d extra was just not enough.