• Home
• Oil & Gas
• News Article

'Oil market likely has sufficient supply-side flexibility in 2012'

By By SYED RASHID HUSAIN For a change, the IEA and the OPEC are on the same page. And OPEC must be proud of this moment. A consensus has emerged; there is sufficient oil on the markets for now. And this leads us to another rather ominous assumption that there is enough available capacity for Washington to play hardball with major crude exporter Iran.

For years the Paris based International Energy Agency, the OECD energy watchdog has been saying - rather insisting upon the producers, the OPEC - to open its taps. Yet, for now, it is contented with the available supplies.

In a just released analysis, the IEA conceded there was enough oil supply worldwide to prevent a price shock if Iran is blockaded this year. "The market in 2012 likely has sufficient supply-side flexibility" to adjust to any loss in Iranian volumes due to sanctions, its monthly report said. The report cited softer demand growth, the available Saudi spare capacity and the resumption of supplies from Libya, as the prime reasons for this newly found confidence within its ranks.

David Fyfe, the old familiar face at the IEA headquarters in Paris, the head of its markets division, while talking to a correspondent last week, repeated the same mantra: "We're looking at a reasonably well-supplied market for 2012," Fyfe said. Rising production in Libya, Iraq and Angola will offset unplanned outages in Syria, Yemen, South Sudan and the North Sea, he said.

This is music to ears, Fyfe!

For, until very recently, no matter what the producers did, the IEA has been adamant about the need to open taps still further irrespective of paying heed to their concerns. Only last month, the International Energy Agency warned of a summer of worries in global oil and products markets unless the Organization of Petroleum Exporting Countries introduced a substantial output increase shortly. In the report, the IEA also raised a serious question over the capacity of refiners and the keenness of OPEC to meet a 1.6 million barrels-a-day jump in oil-product demand in June. The agency also noted then that the suggestion by OPEC that there is no need to boost its production levels "appears wide off the mark."

In the aftermath of the Libyan crisis last year, and despite the fact that Saudi Arabia and other major oil producers promised of providing all the crude that was needed, the IEA kept pressurizing the OPEC to open the taps.

As late as June last, while it was getting ready to open its strategic reserves, more to take the initiative out of OPEC's hands as some analysts believed then, the IEA was bringing to the fore the single point agenda - "open the taps." Late in June the IEA called on the OPEC to increase production in view of the damaging implications for the global economy if the output was not boosted.

In its Oil Market report for the month, the OECD energy watchdog noted then that although the OPEC crude supply had increased by 210,000 barrels per day (bpd) in May, (yet) it remained down by 1.25 million bpd because of the Libyan crisis. It then insisted that the "call" on OPEC oil was set to rise by 400,000 bpd, revealing a "clear need" for the group to boost supply.

The current change in the IEA tone is thus conspicuous in more than one ways. One though could not fail to notice the political link to this change in mood and tone. Maybe the political necessity forced the IEA to finally change the focus. Or maybe the towering figure of Richard Jones at the IEA played the cards well.

Indeed, and one should not over look these too, the emerging precarious economic scenario is also playing into the hands of hawks in Washington and elsewhere.

The global economic horizon is darkening one can't deny. Energy markets are taking a direct hit too. Both the IEA and the OPEC are converging on the point that the demand growth is slowing down, giving much more latitude to Washington to squeeze Iran further.

Only last week, the IEA announced cutting its 2012 global oil demand forecast for a sixth month as a "darkening" economic outlook reduced prospects for growth amid supply concern following sanctions on Iranian crude.

Worldwide crude consumption will increase by (only) 800,000 barrels a day to 89.9 million barrels, from 89.1 million last year, the IEA predicted in its monthly oil market report. That's 300,000 less than its previous estimate. The agency cut its forecast after a "sharp deterioration" of economic growth projections by the International Monetary Fund last month to 3.3 percent from a September forecast of 4 percent.

Almost at around the same time, the OPEC secretariat too cut its forecast for global oil demand in 2012 as the economic recovery struggled to gain momentum. OPEC reduced its estimate of consumption for this year by 120,000 barrels a day, to 88.76 million a day. That means oil demand growth will slow down to 900,000 barrels a day in 2012 from 1 million last year.

Interestingly the IEA too conceded and underlined that the OPEC pumped 1 million barrels a day more in January than the average amount required from the group this year. OPEC's 12 members boosted output by 80,000 barrels a day last month to a three-year high of 30.9 million a day, as Libya raised production, the IEA acknowledged. The organization will need to provide an average of 29.9 million barrels a day this year, just under the 30 million-output target agreed at its last meeting on Dec. 14, IEA said.

What a major change. The OPEC is no more the usual punching bag. Everyone agrees it is supplying more than what the markets required. No mean a recognition.

Indeed politics and oil go hand in hand - one can only underline here.

The OPEC data also confirms the trend, indicating that the 12 members of the group were pumping about 1.35 million barrels a day more than consumers needed in the first quarter. It produced 30.9 million barrels a day in January, compared with estimated requirements of 29.55 million.

And the signing of the 20 year supply agreement between Saudi Aramco and South Korea's third largest refiner signed S-Oil is not only rare, but it may herald major changes in the way deals are done in the industry today.

The contract, "highly unusual" in a market where one-year supply deals are the norm, was signed as Asia's crude consumers are under intense US pressure to reduce imports from Iran.

The contract was definitely the first long-term commitment of its kind by the world's top crude exporter, and indicates the changing psychology of the market, now preferring to bank on secured, long-term supplies.

The brewing Iranian crisis is bringing about major changes in the very style of the industry. Not only the IEA and the OPEC are interestingly on the same page today on the issue of production, but by signing a 20-year deal, Aramco and S-Oil have made another historical first too.

We are a witness to these interesting changes!

© Arab News 2012