Opec needs to break its strict compliance with massive output cuts and boost production to stop a steady rise in crude prices and save the global economy from further damage, a research energy centre said yesterday.

Although oil prices have nearly doubled since the start of the year, Opec has done nothing to halt the increase, again blaming speculators, the London-based Centre for Global Energy Studies (CGES) said in its monthly report, a copy of which was sent to Emirates Business.

More supply would obviously address the slowly tightening market fundamentals, should it prove to be the cause of higher prices, said CGES, which is run by former Saudi Oil Minister Sheikh Ahmed Al Yamani.

However, rising production would also change market perceptions, indicating to speculators that Opec is as serious about preventing sharp price rises as it was about halting last year's sharp fall, the centre said.

"The fact that we have seen no hint of more production from Opec suggests that neither the organisation, nor its key members, have any real interest in halting the rise in oil prices," said CGES, which comprises former Opec officials.

"The holders of the world's spare oil production capacity are happy for now to blame 'investors', thus using a new euphemism for the previously despised term 'speculators', while happily banking the increased revenues with little apparent care for the damage that the high prices might do to any budding economic recovery... Opec members have the capacity to moderate the rise in oil prices, but are choosing not to do so."

According to CGES, oil prices have been on a rising trend since the beginning of 2009 and have risen particularly sharply since early May, "to the delight of Opec and the dismay of many economists who fear that the global economy remains too weak to tolerate such a sharp rise and other commodity prices".

It said the causes of the surge in oil prices are hotly debated, adding that a rational market should be responding to the sharp price rise with an increase in supply.

"This is not happening: Opec's oil production has barely risen at all in recent weeks and is well down on its start-of-year level," it said.

"What lies behind the causes of the near-doubling of oil prices in a period of sharp global recession and a steep fall in global oil demand is strongly contested. Some see the start of upward price pressure coming from market fundamentals, with Opec's supply cuts having put a floor under the market and set prices back on an upward path as the year-on-year fall in demand eases."

But the report added it believed market fundamentals do not appear tight enough yet to justify an oil price around $70 a barrel.

"More important, perhaps, is market sentiment, which has switched from bearish to bullish as the economic outlook has become less bleak."

It said bullish sentiment has been boosted by comments from Opec ministers, at least one of whom has suggested that Opec will continue to support higher prices and that there will be no increase in the organisation's official output target before prices reach $100 a barrel.

"Opec, the holder of all the world's readily available spare oil production capacity, ought to be responding to the surge in oil prices by increasing supply, but it is not doing so. Indeed, at its most recent meeting in late May, the group's members reiterated their firm commitment to the individually agreed production allocations negotiated last December," it said.

"Opec argues that the oil supply/demand balance remains weak and stocks are still high; prices are rising because of speculative activity on futures markets, suggesting that the world does not need more of its oil."

 

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