The Current Oil Market

Speech by OPEC Secretary General, HE Abdalla S. El-Badri, to the 13th International Oil Summit, Paris, France, 3 May 2012

[Slide 1]
Excellencies, ladies and gentlemen,

Good morning.

I would like to begin by thanking the organizers of this event for the opportunity to deliver this keynote address on the current oil market situation. It gives me great pleasure to be here in Paris.

[Slide 2]
I think we can all appreciate that both last year and the first part of this year have been another eventful and testing time for the global oil and energy industries.

Last year saw much turbulence in the global economy, alongside events that none of us could have predicted – such as the uprisings in a number of countries in North Africa and the Middle East, and the destructive Japanese earthquake and tsunami, and the subsequent nuclear crisis.

This year we continue to see much uncertainty about the future of the global economy; oil prices trending upwards; much focus on geopolitics; as well as supply disruptions in Syria, South Sudan, Yemen and the North Sea, although this has been offset by Libya taking enormous strides in bringing its production back to pre-uprising levels.

While there has been no shortage of oil in the market, as we head into the second half of 2012 there remain many concerns for the market to digest and act upon.

[Slide 3]
Global economic growth continues to be patchy and uncertain.

In the US, there have been some recent positive signs. The US Federal reserve has suggested that there are grounds for “cautious optimism” and both labour market and consumer confidence are improving. However, GDP for the first quarter of this year, at 2.1 per cent, is a little down on the 3 per cent for the final quarter of last year.

In Japan, there have been some improvements in areas such as manufacturing and consumption, but the country is still suffering from the consequences of last year’s triple disaster.

The Euro-zone continues to struggle with sovereign debt issues, with yields on Spanish and Italian rising again. The region’s economic growth continues to decline with the forecast for this year now a contraction of 0.3%, with Greece seeing a deeper-than-expected fall of 5%. And unemployment rates remain high. There are many uncertainties for Euro-zone leaders. The road ahead remains extremely rocky.

The UK has recently announced that it has slipped into its first double-dip recession since 1975.

In China, while economic growth remains above eight per cent, recent data suggests that the economy is slowing. However, it is unclear whether this is a long-term trend, or just a short-term issue.

And in developing countries, in general, there are concerns as to whether problems in the OECD will spill over into their economies, particularly in terms of reduced demand for their exports, as well as less investment capital from the developed world.

There is clearly much to keep policymakers engaged as countries and regions strive to get their economies back on track. The economic recovery remains fragile.

[Slide 4]
In terms of prices, this year we have generally seen moving in an upwards direction.

However, current prices are not due to market fundamentals. Speculation is pushing prices higher. Trading is being made on the perception of a supply shortage, rather than evidence of any actual or impending shortfall. It is related to geopolitics. In many respects it can be described as a ‘fear factor’.

As we are all aware, oil is increasingly being treated as an individual asset class by financial investors. Since 2005, the total open interest of the NYMEX and ICE Brent crude oil futures and options has increased sharply.

Today, the level of open interest on the NYMEX is close to 3 million contracts. And combined with Brent it is 3.85 million. It means that the level of open interest on these two exchanges is equivalent to more than 44 times the size of physical demand.

The issue of speculation was discussed in much detail at the recent 13th International Energy Forum (IEF) Ministerial in Kuwait. It is also a topic that has been an area of cooperation between the International Energy Agency (IEA), the IEF and OPEC, agreed upon at the12th IEF in Mexico in 2010. To date this has included two workshops and forums on the inter-linkages between physical and financial energy markets, and on regulation.

I am sure everyone here can appreciate that we cannot avoid speculation and volatility altogether. It is a part of the market. However, it is essential that we look to mitigate extreme volatility and excessive speculation, which are detrimental.

It is important that prices do not impede economic growth.

[Slide 5]
On the supply side, this year there have been disruptions in Syria, South Sudan, the Yemen and the North Sea. These developments, however, have had minimal impact on the market. And in reality they have been more than offset by the quick return of Libyan crude to the market. In December last year, Libyan crude was close to 800,000 barrels a day, whereas now it is around pre-war levels of 1.5 million barrels a day.

In addition, it should be noted that the first quarter of the year saw a relatively strong increase in non-OPEC supply. From the 2011 average, it increased 400,000 barrels a day in the first quarter of this year, led mainly by developments in North America.

As this slide underscores, world oil supply is increasing. It has done significantly since May of last year.

This leads me to the question: Where do we stand today?

Allow me to give you some further figures.

[Slide 6]
Total OECD commercial oil stocks remain at healthy levels. In the past month or so they have trended upwards and are now above the five-year average.

Forward demand cover in March for the OECD is over 59 days, compared to the five-year average of 56.

And there has also been a steady build up in commercial and strategic petroleum reserve stocks in non-OECD regions, such as China and India.

[Slide 7]
In terms of OPEC crude production, there has been a steady rise over the past few years, as shown in this slide. In fact, since March 2011 there has been an increase from 28.8 million barrels a day to the current 31.3 million barrels a day.

The Organization is making sure its consumer’s needs are met.

At the same time, spare capacity remains at comfortable levels. For OPEC, it is around 8% to 10% of its total capacity. And we see these comfortable levels remaining for the foreseeable future.

When looking at the global demand and supply balance, the story for 2012 is one of rising demand and plenty of supply to meet this increase. The projection is for a surplus supply balance in each quarter of 2012.

Global oil demand is forecast to grow by around 900,000 barrels a day in 2012. Non-OPEC supply is expected to increase by 600,000 barrels a day in 2012.

And from OPEC’s perspective, demand for its crude in 2012 is projected to average 30 million barrels a day. This is more than 1 million barrels a day lower than its current production volume.

It reinforces the Organization’s commitment to market stability.

[Slide 8]
Excellencies, ladies and gentlemen,

Allow me to reiterate my key messages concerning the current oil market situation.

What is clear is that there has been no shortage of oil in the market. Producers have been able to meet consumer’s needs. There has been, and there remains, more than enough supply to meet demand. We also see this as the case for the rest of 2012 and the foreseeable future.

Global economic growth remains an uncertainty, with the Euro-zone continuing to be the main area of concern.

And today’s price levels continue to be driven by excessive speculation. It is essential we look to mitigate this.

Our goal today, and in the future, must be one focused on stability. It is critical we focus on the market fundamentals and continue to evolve a clear and consistent environment; one that enables the industry to develop, produce, transport, refine and deliver energy in an ever-more efficient and economic manner.

[Slide 9]
Thank you for your attention.

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