Insight: Opec 2008 — oil prices ‘extremely changeable’ | FT Alphaville

Insight: Opec 2008 — oil prices ‘extremely changeable’

Opec officials blame volatility of oil prices on speculators. In fact, although speculators contribute to the magnitude of the price fluctuations, Opec remains their “prime cause” says Ed Morse, chief energy economist at Lehman Brothers in Thursday’s Insight column.

Opec’s role in volatility is reinforced by three factors suggests Morse: first, increased internal factionalism and the politics of consensual decision making; second, Opec’s greater prominence in incremental oil supply; and third, Opec’s own demand growth

    Low prices (circa 1998) offered an “incentive for collaboration” given shared goals, but as prices have risen, this has disappeared and socio-political agendas have come in to play. This includes the anti-US positions of Iran and Venezuela and the effectively under-the-radar transactions with countries like China, whose customs reporting is err… insufficient.

    Less transparency equals increased volatility, in Morse’s view. In addition, he says, Opec production has stagnated, today Iraq and Venezuela combined produce 4.4m b/d, previously they could produce up to 6.4m b/d. “But with more investment and a stable political environment, today they could be producing double current levels.”

    Although Opec’s capacity may grow substantially by 2010, the producers now confront their own high oil demand growth sparked by higher oil prices and torrid industrial and infrastructure investment. Middle East producers’ oil demand grew by 350,000 b/d last year and could see 400,000 b/d growth in 2008 despite a slowdown in global economic conditions.

    On top of that, current delays in regional natural gas projects look likely to make last summer’s problems even more extreme in 2008. So, we can expect another price spike in the summer, says Morse.

    For the year ahead, oil prices are in for a bumpy ride given current economic conditions, with Morse expecting that the $84 Brent forecast may oscillate round a wide band of $20 or more throughout 2008.