March 2007, IOR Exclusive

First Iran Oil Refining Forum (IOR1) | Summit 2007

One Year On in Oil

The year 2006, was a year for new oil reserves discoveries and the emergence of new oil producing countries. Nigeria was the first country to announce new oil discoveries in the delta region of Niger River.

Iran and the Oil Markets: There is no doubt about the role of Iran’s nuclear case and its political consequences on oil market developments in 2006. Since Iran’s nuclear dossier was taken up by the International Atomic Energy Agency, major crude oil importers have been concerned about Iran’s reaction to the decision. Some analysts maintained that Iran, as the fourth biggest oil exporting country, will react to the International Atomic Energy Agency’s decisions by temporarily limiting or even cutting its crude oil exports. No analyst was able to clearly explain the possible aftermath of such a decision. Aftert the IAEA decided to refer Iran’s nuclear case to the United Nations Security Council, tensions escalated.

Chad was joined oil exporting countries in 2006. Although it had started oil prospecting in 2005, the first consignment of Chadian crude oil left for China in the middle of 2006.

The market shock resulting from that decision was so serious that crude oil prices increased by more than 5 dollars at New York Mercantile Exchange in a matter of four working days. Oil prices were skyrocketing and many dealers were waiting for Iran’s reactions. Remarks by Seyed Kazem Vaziri Hamaneh, the Iranian Minister of Petroleum, helped calm the markets. He noted that Iran was not planning to use oil as a weapon. The calculated measure by Iran, which indicated our country’s respect for its international commitments, calmed down the oil markets. Iran’s nuclear dossier topped the agenda of international political circles once more in April, kindling new fears about future oil supply coming from the country. Although Iran never used oil as a weapon, international prices crossed the 70-dollar mark as of April 17, 2006.

70-Dollar Oil: Iran’s nuclear crisis along with other political factors took oil prices as high as 70.40 dollars per barrel in the third day of April’s trading week. Good or bad, the period of expensive oil had begun and lasted for 137 days. An oil price of 70 dollars per barrel set the stage for a new development. In July, Israeli forces stormed South Lebanon after some of their soldiers were taken into captivity by Hezbollah. The invasion turned into a full-blown war, which lasted 33 days. The main concern was the possible spread of the conflict to major regional oil producing countries such as the Saudi Arabia. Therefore, oil prices soared as high as 78.40 dollars per barrel by July 14, 2006, with the OPEC basket exceeding 72 dollars per barrel. A lengthy period of high oil prices left its negative mark on many global economies. The American economy, as the world’s biggest economy and number one oil consumer, was hit the worst. The high economic growth rate of 5.6 percent, which was experienced in the United States during the first quarter of the year, was reduced by half in the second quarter as a result of stagnation in such key industries as automobiles and airplanes. Increased retail price of fuel affected by high crude oil price exposed US economy to inflationary risks.

All Fall Down: Oil consumer countries gradually got used to oil prices in excess of 70 dollars per barrel. Moreover, a number of factors helped ease demand and quite previous political storms. Travel season ended in the United States, greatly reducing demand for gasoline, and the summer war between Hezbollah and Israel also came to a standstill after 33 days. Finally, on September 1, 2006, oil prices dropped below 70 dollars per barrel to hit 69.19 dollars per barrel. In fact, August 31 was the last day in 2006 when oil prices stood higher than 70 dollars.

The downturn continued rapidly. Cold weather in the United States, especially its northern parts, is a major factor that affects global oil prices, but meteorological reports indicated that the cold will not be that bad. Therefore, demand for diesel fuel and fuel oil did not increase unexpectedly. Lack of demand upsurge, pulled oil prices down to below 60 dollars per barrel and international oil prices hit as low as 58.68 dollars per barrel on October 3, 2006. In this way, crude oil price was reduced by 25 percent in 45 days.

Production Competition: The unexpected rise in oil prices led to intense competition among crude oil producers as global demand surpassed 84 million barrels per day. Each producing country endeavored to claim a bigger portion of the global production. Although that competition increased the revenues of oil producing countries, some analysts blame it for the nosedive in oil prices after August. Small oil producer countries that enjoy fewer reserves are willing to pump more oil when prices are high. An oil price of 70 dollars per barrel offered the best opportunity for those countries to boost production as much as possible. Reports released by the International Energy Agency revealed that most small producers had exceeded their production quotas in June, July and August. OPEC members also embarked on unbridled oil production.

Overproduction led to the existence of surplus oil in the markets and paved the way for further reduction of international oil prices. Production competition also changed the order of countries in the list of major crude oil producing countries. Thus, Saudi Arabia which ranked the first among oil producer for many years, gave way to Russia. Helped by its oil giants, Rosneft and Lukoil, Russia topped the list of oil producer countries in July and August.

Renewed Price Wars: The subsequent oil price fall on the threshold of the cold season prompted member countries of the Organization of Petroleum Exporting Countries to find a way to curb a further price slump. As oil prices fell to 56 dollars per barrel in October, rumors had it that OPEC was planning to reduce its output ceiling. The news evoked memories of the OPEC oil war of the 1970s. At that time, Zaki Yamani, the then oil minister of Saudi Arabia, announced that the time for inexpensive oil was over. It seemed that 30 years later, OPEC was again waging a price war. Finally, the organization approved a two-stage fall in output. In the extraordinary meeting of member countries in Doha in October, OPEC decided to slash its crude oil production by 1.2 million barrels per day as of the beginning of November. If that had happened, it would have seriously shocked the markets and dislodged prices. However, it did not happen since member states could not reach consensus. Members had raised production ceiling to above 28 million barrels per day in the heat of production competition and were not willing to cut production yet.

The United States has announced that it would limit oil delivery into Strategic Petroleum Reserves as of January. Meanwhile, China has reduced its crude oil imports for the past three months.

A few days after the Doha meeting, some OPEC members stated that they were not able to comply with the ratification. Nigeria, which was the rotational chairman of the OPEC, along with Indonesia and Algiers issued official statements announcing that they were not ready to comply with the Doha decision. The statements marred OPEC’s track record and reduced its impact on international oil markets. Statistics show that OPEC only realized 750,000 barrels per day of the predicted 1.2 million barrels per day. During its ordinary meeting in Abuja, capital city of Nigeria, on December 14, another 500,000-barrel reduction was approved and was supposed to be enforced from the beginning of February. The circumstances surrounding the issue cast serious doubts on the possible compliance of OPEC members with its decisions and its effectiveness in regulating international oil markets.

New Reserves, New Producers: The year 2006, was a year for new oil reserve discoveries and the emergence of new oil producing countries. Nigeria was the first country to announce new oil discovery in the delta region of Niger River. Nigeria also went through many crises and unrests caused by insurgents in various parts of the country. Nigeria is a major oil supply source for the United States and new discoveries there will increase security of oil supplies to the United States. Iraq was the second country to announce new oil discovery. The new oil field was located in northern part of Iraq and early estimates showed that its underground crude oil reserves exceeded 120 million barrels.

2007, the Year of Bewilderment: Most analytical reports that were released before the start of 2007, indicated bewilderment of analysts in the assessment of crude oil market conditions. The psychological warfare between oil producing and consuming countries has created a non-transparent situation which makes any form of speculation difficult. Under the circumstances it will be difficult to rely on the expressed statistics. J. P. Morgan Institute has predicted oil prices to reach about 67 dollars per barrel in early 2007. Although OPEC has announced that it will consider another output cut in February, consumer countries have already reduced their demand.

Yet, it seems that analyses that are based on oil price reduction are closer to realities. The four-year rally of oil prices, which reached their peak at 78.40 dollars per barrel on July 14, 2006; has already ended and the oil price is sliding down the slope.