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Opec urged not to make further production cuts

DUBAI — Opec needs to reconsider its policy of maintaining a tight grip on oil production, because it is negatively impacting the world economy, argues the Centre for Global Energy Studies (CGES) in its Monthly Oil Report for August.

Opec began making formal output cuts in October 2006 and has continued to do so, even though market demand has tightened, says the CGES report. It has placed "the blame for rising prices on geopolitical tensions and bottlenecks in the global refining system", it says.

"The result has been three consecutive quarters during which global inventories have fallen and, with no sign of output rising, a further two quarters of decreasing global oil stocks are expected. This looks very much like a reversion by Opec to its earlier policy, only abandoned in 2004, of deliberately keeping the world short of oil in order to force down stocks," it continues.

The CGES also says: "Opec appears content to sacrifice future oil demand growth for immediate revenue gains. Four years of high, and rising, oil prices have taken their toll on global oil demand growth and look set to continue to do so."

The CGES emphasises that it is "far more pessimistic" than similar organisations (particularly the IEA) about the prospects for oil demand growth in both 2007 and 2008. The main reason for this pessimism is the impact of sustained high oil prices and the knock-on effects of the problems in the US sub-prime mortgage market.

CGES forecasts show that if total Opec output crept up "by only little more

than the rise of Angola's production over the coming winter then oil prices will remain above $72/bbl for Brent and $68/bbl for Opec's Reference Basket (ORB)". But even if Opec were to cut output, by say 0.7mbpd, to compensate for slower growth, prices would still be high, argues the CGES. "The strong prices expected in the first half of 2008 would still yield an increase of around five per cent in the annual average oil price between 2007 and 2008," it says.

The CGES also forecasts that a sharp downtown in US growth would, in turn, slow demand for Chinese exports — which is fuelled by US consumption demand — and thus oil demand growth in Asia. "Oil demand growth could evaporate even in the boom economies of Asia, leaving the oil-producing countries themselves as the only engines of growth in the oil market," CGES argues.

If oil demand growth were to slow by 0.2 per cent (only 0.2 mbpd) in 2008, oil prices would fall sharply in the second half of the year and the decline could begin immediately, it forecasts. But if global oil demand turns out to be more robust than the base case used by CGES, "prices could surge again in 2008," it says. "In an environment of tight Opec control over output levels, even global oil demand growth of just 0.7 per cent (600,000 bpd) next year would be enough to put oil prices on a rapidly rising path," it notes.

Moreover, if Opec output were to increase by only 0.2 mbpd each quarter until the middle of each year, the trend of rising oil prices seen in the first half of the year would continue, says the CGES, "taking Dated Brent up to almost $100/bbl during 3Q08".

The CGES sends a warning to Opec: "If oil demand growth does collapse and oil prices start to fall, Opec would do well to avoid the temptation to cut output in support of prices, since this would only undermine further the demand for its oil." It says that slow oil demand growth is responding, in part, to four years of high and rising oil prices "which have now been too high for too long. The global economy clearly needs a period of more moderate oil prices to recover and Opec member countries must play their part."