A prominent Arab energy analyst has blamed Opec for the collapse in crude prices, saying the oil cartel has failed to fully comply with output cuts and kept sending contradicting messages to the already sceptic market.
Nicholas Sarkis, Director General of the Paris-based Arab Petroleum Research Centre (APRC), which acts as an adviser to the Organisation of Arab Petroleum Exporting Countries (Oapec), described Opec's behaviour in dealing with the faltering crude demand over the past few months as "suicidal."
In an article published in the APRC's monthly magazine, Arab Oil and Gas, Sarkis urged the 12-nation Opec to announce a target for its oil price and to abide by output reductions to attain it.
He said crude prices had failed to respond to Opec's policy of continuous cuts, the latest of which was in Algeria on December 17, when its oil ministers agreed on a massive reduction of 2.2 million barrels per day.
"For the third time in a row, the latest meeting held on December 17 had the immediate impact not of bringing about the hoped-for rebound in prices but of speeding up their collapse, so much so that the monthly average value of the Opec crude basket fell from $112.4 in August, the month preceding the first of these Opec gatherings in September, to $49.7 in November and an average of $34.9 in the week that followed the December meeting," he said.
"At first sight, this calamitous outcome may seem particularly surprising insofar as the organisation decided in the meantime to implement relatively large cuts in production, reducing output by a total of 4.2 million bpd from January 1."
Sarkis cited three main reasons for Opec's failure to prevent the price crash including the fact that the latest reductions remained ink on paper until January 1 and the previous cut of 1.5 million bpd was not fully enforced, with the rate of compliance by its members not exceeding 55 per cent.
He said the second reason is that the surplus of supply on the world market has led to a sharp increase in industry stocks in industrialised countries, which reached an estimated level of fully 2,707 million barrels at the end of November, equivalent to more than 57 days of forward consumption, or five days more than the average of 52 days that are regarded as "normal".
He noted that the level of stocks corresponds to double the annual output of Iran and to more than five times the production of Algeria.
Sarkis said he believes the exceptionally high level of stocks that have accumulated in consuming countries, including on tankers, is weighing far more heavily on the balance of supply and demand than the decisions taken by exporting countries, which "remain largely theoretical".
He recalled a decision by Saudi Arabia, the world's dominant oil exporter, to boost output by 500,000 bpd in order to arrest the rise in prices, saying such a move resulted in additions to stocks of some 45 million barrels last summer.
"Just to return to a level of stocks that can be regarded as more normal, which is to say to soak up a stock surplus corresponding to five days' consumption, or some 240 million barrels, Opec countries would now have to start applying absolutely strictly the cumulative reduction in output of 4.2 million bpd for a period of nearly two months, provided, of course, that world demand did not decline further, especially in the run-up to next spring, when world needs could decline by 0.9-1 million bpd relative to the first quarter of 2009," he said.
"A third reason, but by no means the least, for the failure of Opec decisions is the widespread scepticism with which they were greeted by the oil markets. That scepticism is attributable first and foremost to the partial compliance with the 1.5-million bpd cut in that was due to take effect on November 1.
"It can also be explained by the contradictory attitudes adopted by different Opec members and by the absence or inadequacy of clear signals sent to the market regarding the determination of Opec producers to reverse the downward trend in oil prices and bring them back up to a specified level within a specified time through the implementation of specific measures."
According to Sarkis, several official communiqués released by Opec over the past few months "curiously omit to give an exact figure for the desired level of prices and a clear road map for getting there". He said things would certainly have been different if exporting countries had decided at their last three conferences simply to return to the system in use before the war in Iraq in March 2003, "which entailed setting a floor price and a ceiling price for their exports", as well as implementing automatic, precise reductions and increases in production to attain their ends.
In the current circumstances, he added, the price of $75/b that is regarded as desirable by Saudi Arabia and many others represents a good average of the figures that have been more or less explicitly suggested by various officials in both exporting countries and industrialised nations.
"Restoring oil prices to a level of at least $75 seems that much more necessary insofar as an almost unanimous consensus is evident on both sides about the fact that the level to which oil prices have fallen can only discourage investments both in the hydrocarbon industry and in those involving the development of other energy sources, " Sarkis said.
He noted that dozens of exploration-production projects have already been deferred or simply scrapped worldwide, with the result that total supplies could be reduced by around five to eight per cent by 2011-2012.
He said the contraction in expenditure affects the most costly projects, such as those that were planned in Canada and for which an oil price of $90-$100 is regarded as necessary to assure a minimum rate of return.
"In addition to the collapse of prices, energy investments are affected by the extreme volatility of the market, the credit crunch and very poor visibility as regards the development of the demand-supply balance over the medium and long term. Another reason for the cutbacks in investments is that, despite the slide in prices, the costs of many projects have not fallen in anything like the same proportion. It is reasonable to expect this situation to last for as long as the end of the tunnel in the financial turmoil is not in sight."
"As far as a possible recovery in oil prices is concerned, we will now have to wait and see the full scale of the cuts in production implemented in both Opec and non-Opec countries. Another positive factor could be acceleration in the closure of wells and small fields that have become unprofitable in the current environment, especially in North America.
"Meanwhile, exporting countries will continue to suffer the consequences of their suicidal behaviour, firstly in fuelling the surplus of supply and the build-up of stocks and now by hesitating about taking the radical measures required to restore oil prices to around the $75 mark," he said.