Urgent Opec meeting is unlikely

Opec will unlikely hold an emergency meeting to take action to ease boiling oil prices that have soared above the $100 psychological barrier mainly because of unrest in Opec producer Libya, a key Saudi bank has said.

The Saudi America Bank Group (Samba) said it expected crude prices to remain volatile but would fall back again once the turbulence in the Middle East and North Africa (Mena) region begins to subside.

In a study published this week, SAMBA said the surge in crude prices presents the 12-nation Organisation of Petroleum Exporting Countries with a challenge as it brings with it increasing pressures to raise output which it believes may not yet be justified by market fundamentals.

It noted that there was a strong seasonal drawdown in OECD stocks in the second half of 2010. But it added that while this is evident of a tightening market balance, it would appear insufficient on its own to support $100 plus oil prices.

In terms of forward cover OECD stocks are still significantly above the 52 days previously sought by OPEC, standing at nearly 58 days at end-2010 according to the International Energy Agency, the report said.

In addition, despite existing quotas, OPEC has already been raising its production, which was up 2.2 per cent on average in 2010 or around 550,000 barrels per day, the report added.

“OPEC has also made it clear that it will act to ensure the market is well supplied, while suggesting that current circumstances do not yet necessitate a general quota increase as high prices largely reflect the temporary impact of unusually cold weather in the northern hemisphere and a political risk premium following events in the MENA region,” SAMBA said.

“OPEC meanwhile is still concerned about the fragility of oil demand and sees a possible softening in the second quarter. In this context, we expect the cartel will wait until it’s next scheduled meeting in June before considering taking formal action. By then both Brent and WTI prices may well have drifted back down from recent highs, supporting OPEC’s view that the market is well supplied.”

The report said it believed prices have sharply increased because of Middle East events, the unusually cold weather in the northern hemisphere, better than expected growth in the US and Europe, and strong demand from Asia.

“However, while acknowledging the potential for a major geopolitically-induced supply shock, we do not see this as a central scenario…..the global supply situation is not currently strained, as evidenced by the still-comfortable levels of stocks, particularly in the US which partly explains the record WTI discount to Brent that has emerged, although this also reflects the fact that Europe is most at risk from any supply disruption in North Africa,” it said.

“In addition, OPEC retains ample spare capacity, mostly in Saudi Arabia. We thus expect prices to fall back when geopolitical fears recede, and as cold weather-induced demand eases off. That said, we are probably in for an extended period of volatility as markets react to developments in the region.”