Market awaits Opec decision
WITH oil markets trading at record-breaking prices, all eyes are on Opec tomorrow as the group meets in Vienna to decide whether to keep its production quotas unchanged – or cut output in support of prices. Market sentiment appeared to accept that the cartel would roll over existing quotas, despite calls from consumers to release more oil onto the market.
Ahead of the meeting, Chakib Khelil, Opec's president, said it had "no plans to raise production". Opec maintains that the rise in the price of oil is due to the dollar's weakness. Recent interest-rate cuts by the US' Federal Reserve has put pressure on the currency, forcing up the price of dollar-denominated oil. It has also mitigated the effect on prices of an easing of supply worries: on Monday, Shell said it had ended force majeure on crude exports from Nigeria, which it declared in January.
On Tuesday, the contract for light sweet crude for April delivery was trading at $102.50/b in New York. That represented a slight softening of prices, which had earlier hit $103.95/b – by most measures the highest price of oil in history, after adjustment for inflation.
Pointing to the dollar's weakness as the source for the rise in prices, Libya's oil minister said on his arrival in Vienna: "The world has changed. The dollar is down, $100 is not what it used to be." The dollar this week fell to €1.5275, its lowest point against the euro. "As goes the greenback so shall go WTI – in the opposite direction," remarked Stephen Schork, editor of the Schork Report.
Further pressure on the dollar could come if the Federal Reserve decides to cut interest rates again to boost the faltering US economy. Chairman Ben Bernanke said last week that more cuts could be made, as the bank puts concerns about growth ahead of its worries about inflation.
Despite Opec's claims that the market remains well supplied – claims supported by crude stock-builds in the US – the group will be wary of the public-relations fallout if it decides to cut production while crude oil is trading at all-time highs.
Opec remains concerned about the prospect of a crash in prices later this year amid seasonally lower demand and slower economic growth in consumer countries. The solution, say some analysts, could be for the group to agree "covert" cuts, as members cease producing more than allowed under their quotas. Last month, Saudi Arabia produced 300,000 b/d more than its 8.9m b/d output target.
Meanwhile, the California Public Employees' Retirement System, the largest pension fund in the US, said it would increase its investments in commodities to $7.2bn by 2010. Last year, it invested just $450m in commodities.
Price drivers this week:
- Opec's meeting on Wednesday
- US interest rates
- Seasonal weather forecasts