In my May 9 post on oil, I concluded that

Opec, particularly the Saudis, are not the friends they claim they are. They are not willing/capable to raise production and are totally content to let prices rise in a relatively orderly fashion.

My point was that high oil prices were as much the result of rising demand as of tightly controlled supply by OPEC, particularly Saudi Arabia and that we should assume that oil prices will stay elevated barring a sharp economic slowdown.


In its May 19 Oil Market Update, the IEA unsubtly criticized Saudi Arabia which claims that current high prices are due to speculators and paper demand (my emphasis).

Our analysis shows that the move in prices from around $75/bbl in September to near $100/bbl at end- 2010 had a clear foundation in market fundamentals, with demand running ahead of supply by around 1mb/d. Further price increases in 2011 have been augmented by the loss of 1.5 mb/d of Libyan crude supply since late-February, and fears that political instability sweeping the Middle East and North Africa (MENA) could spread to other major producers. A weakening dollar and other financial market factors have also contributed. IEA estimates suggest April OPEC production of 28.8 mb/d was 1.3 mb/d below pre-Libyan crisis levels.

The loss of Libyan crude volumes now looks likely to be a protracted one. Oil demand growth in 2011, while moderating from 2010’s heady levels, is likely to remain substantial, and the implied ‘call on OPEC crude and/or stock change’ (based on refined products demand) looks likely to rebound to nearly 30 mb/d in the second half of 2011, after a seasonal dip in 2Q. A seasonal increase could increase throughputs by 2.3 mb/d from an April low to an August high. It is important that rising demand from refiners be met on a timely basis. The hypothetical scenario shown below, of OPEC production remaining at April’s 28.8 mb/d through 2011, implies a further sharp tightening in market fundamentals, which could see a renewed and highly damaging surge in prices.


The same day it issued its OMU, the IEA governing board issued a statement clearly aimed at the Saudis (my emphasis):

(…) As global demand for oil increases seasonally from May to August, there is a clear, urgent need for additional supplies on a more competitive basis to be made available to refiners to prevent a further tightening of the market.
(…) The Governing Board urges action from producers that will help avoid the negative global economic consequences which a further sharp market tightening could cause, and welcomes commitments to increase supply. We stand ready to work with producers as well as non-member consumers; in this constructive spirit, we are prepared to consider using all tools that are at the disposal of IEA member countries.

The statement fails to list what these tools are. If there are any, none has ever been used as far as I remember. I can only see a “moral suasion” through public admonition which the May 19 releases could be the first salvo.

OPEC will meet on June 8 to discuss production ceilings.

Interestingly, the Minutes of the FOMC meeting of April 26-27 reveal a new unease of the FOMC participants on inflation as the “transitory” nature of rising oil and other commodity prices is now questioned (my emphasis):

Many participants reported that an increasing number of business contacts expressed concerns about rising cost pressures and were intending, or already attempting, to pass on at least a portion of these higher costs to their customers in order to protect profit margins. This development was also reflected in the rising indexes of prices paid and received in several regional manufacturing surveys. (…)

Participants generally anticipated that the higher level of overall inflation would be transitory. This outlook was based partly on a projected leveling-off of commodity prices and the belief that longer-run inflation
expectations would remain stable. (…) Many participants had become more concerned about the upside risks to the inflation outlook, including the possibilities that oil prices might continue to rise, that there might be greater pass-through of higher commodity costs into broader price measures, and that elevated overall inflation caused by higher energy and other commodity prices could lead to a rise in longer-term inflation expectations.

The FOMC official statement put a new caveat to the “transitory” nature of rising commodity prices, indicating its concern that high prices might be here to stay.

Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations.


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