Twelve months ago, the oil market entered the new year fresh from a precipitous fall in prices. As the cost of a barrel of crude slid to $40 a barrel, analysts saw an end in sight to two years of stubbornly high prices.

A year on, with no let-up in sight, many in the industry are talking of a paradigm shift in both the structure and politics of the market. On 12 December, OPEC ministers gathered in Kuwait City against a backdrop of prices running at about $55 a barrel. However, far from any talk of increasing the 28 million-barrel-a-day (b/d) collective production quota, the debate centred on whether it should be cut in anticipation of weaker demand in the second and third quarters. In the end, the ceiling was left on hold. But the decision to convene an extraordinary meeting on 31 January sent a clear signal of intent.

‘Many viewed the outcome as a statement from OPEC that it would defend $50 a barrel,’ says ABN Amro analyst Geoff Pyne. ‘However, members are also seriously concerned about oversupply, with substantial amounts of new production about to come on stream in Nigeria and Saudi Arabia and some smaller increments elsewhere.’

Nigeria’s Bonga field will add about 225,000 b/d and the commissioning of Saudi Arabia’s Haradh III development during the first quarter will bring a further 300,000 b/d on to the market. Non-OPEC supply growth is projected by the International Energy Agency (IEA) to rise strongly by 1.4 million b/d in 2006. Concerns about spare crude capacity, which have provided a cushion for prices even in the most bearish periods of the past two years, are set to ease considerably.

The Kuwait meeting underlined the enormous shift in attitude among OPEC members, most importantly Saudi Arabia, in a relatively short space of time. They now feel politically able implicitly to defend a price double what was, until December 2004, their stated ideal, in the face of record product prices hitting consumers in the key US market. ‘There are two main reasons why OPEC is able and willing to aim for prices at this level,’ says Kevin Norrish of Barclays Capital. ‘First, OPEC countries desperately need the revenues. Second, the world economy has proved more resilient to high prices than anyone expected.’ World gross domestic product (GDP) growth is estimated at a relatively robust 4 per cent in 2005. ‘OPEC can also claim they are at least keeping the market stable, which economically is arguably as important as the actual price level,’ says Pyne.

Demand has proved extremely resilient, reflecting the fact that the bulk of global consumption is accounted for by the most affluent nations. Overall, global demand growth is estimated at 1.1 million b/d in 2005, and was forecast by the IEA to accelerate to 1.8 million b/d in 2006. In spite of record pump prices, Americans remain wedded to their SUVs: in the week to 16 December, US implied oil demand hit a new record of 22.2 million b/d, even though prices were close to $60 a barrel.

However, the driver of growth remains the rampant Chinese economy. Its raging thirst for oil averaged about 2.3 million b/d in the third quarter of 2005, compared with 1.7 million b/d in 2003. In late December, outgoing OPEC president and Kuwaiti Energy Minister Sheikh Ahmad Fahad al-Sabah visited Beijing to establish a formal energy dialogue between the two parties. ‘The message from the meeting was fairly clear in our view,’ said Barclays Capital in its weekly market report. ‘In short, it was that China will need a lot of energy, that OPEC members have a lot of energy and that continuing dialogue and channels of communication will be key to promoting general market stability now China has taken its place at the top table.’ Sheikh Ahmad’s visit was part of a wider initiative launched in Riyadh in November aimed at stabilising the market through improved communication between producers and consumers.

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