Of continued slide and OPEC's resolve  

(MENAFN - Arab News) Producers are deeply concerned because the demand is dropping faster. And there are now very apparent steps to somehow balance the markets. The very issue of demand security that OPEC has been highlighting all these turbulent years seems so pertinent at this stage.

And the condition is such that even the otherwise smiling, pleasant Majid Al-Munif, the former Saudi governor of OPEC and the current adviser to the oil minister, has apparently been forced by the circumstances to portray a rather grim and negative outlook. What a transition indeed.

Oil demand could fall by up to 45 percent due to the global financial crisis, admitted Al-Munif in remarks made at a conference last week.

And this is a major shift in sentiments — and it may have long-term consequences too — one has to underline. It was only in October — hardly three months back — that the same Majid Al-Munif was reported to be maintaining a very positive outlook. Talking to Al-Riyadh daily then, Al-Munif clearly stressed that the global oil demand was not showing signs of weakening amid the emerging financial crisis.

He was still optimistic, underlining, "China and the Middle East will be responsible for 60 percent of the additional rising demand." The ongoing financial crisis will not necessarily have a big impact on energy, he said, adding that its impact would be very limited. But all this now seems a fairy tale.

Things have moved at a rapid pace over the intervening period. Distinct signs to the effect are now available confirming that the global demand is shrinking rapidly. The last time world petroleum demand fell was in 1983. And the ghost is back again.

The last three months have been tough. World oil demand fell by 50,000 barrels per day in 2008, and it was expected to fall by another 450,000 bpd this year, the United States Energy Information Administration said in a report in December. Cooling demand was led by a 1.2 million bpd contraction in top consumer, the United States, in 2008, and this was projected to drop by an additional 200,000 bpd in 2009.

Deutsche Bank AG said last week that oil consumption would drop by 1 million barrels a day this year as the US, Europe and Japan face their first simultaneous recessions since World War II.

Goldman Sachs Group Inc. said in a Jan. 9 report that "weak underlying economic fundamentals" would dominate the oil market, maintaining its forecast that oil will fall to $30 a barrel this quarter.

Oil inventories in the Organization for Economic Cooperation and Development nations are also likely to rise to a 10-year high over the next two months, Goldman analysts said.

And after briefly rising, courtesy the ongoing crisis in Gaza, its possible spillover and the harsh winter in the Northern hemisphere, crude continued its downward march falling below $40 a barrel in New York earlier the week on real concerns that output cuts already announced by OPEC (Organization of Petroleum Exporting Countries) will fail to counter the slump in demand.

"It appears that OPEC is making a concerted effort to cut output but it's unclear whether this will be enough," underlines Michael Lynch of Strategic Energy & Economic Research. And indeed despite OPEC efforts to somehow stem this slide, oil is already down 59 percent from a year ago.

Interestingly the markets seem no more interested in the fact that the OPEC was honoring its cut promises. Difficult times indeed require unusual steps and for a change OPEC is standing up to its commitments. "The numbers coming out of OPEC show that there is strong compliance," admits Rick Mueller of Energy Security Analysis Inc.

OPEC leader Saudi Arabia is taking lead. Others are following too. Aramco has already sent notices last week to refiners in Asia that it would lower crude supplies to the region by about 10 percent in February.

This was the third straight month that Aramco has reduced sales. February production "is lower than the target," Petroleum and Mineral Resources Minister Ali Al-Naimi underlined on Tuesday. "We are working hard to bring the market in balance. We will do what it takes to bring the market in balance."

This is significant. And more could come. OPEC oil producers are prepared for "further measures," the grouping's secretary-general said on Tuesday. "All in all, we will not know the full effect of the latest 2.2-million-barrel-a-day reduction, and the degree to which member countries have adhered to it, until Feb. 15," Abdalla Salem El-Badri said in an interview published in OPEC's monthly bulletin.

He said that after Feb. 15 OPEC would review the market and present its findings to an OPEC conference in March. "If then the market is still over-supplied, the conference will not hesitate to take further measures to balance the market."

OPEC is determined. And it has reasons to be firm on its resolve to shore up the markets. It has long been stressing that stable oil prices are essential to ensure long-term investment in the industry. Energy is a costly affair. If fair returns to the investments in this crucial industry are somehow not ensured, it would have a detrimental impact. And that is now a big possibility.

Already clouds are gathering around a number of projects in various parts of the world. Even the search for new sources and alternatives could get a big hit, most now agree.

Only last month Al-Naimi assured the world that Saudi Arabia would continue to invest in upstream and downstream energy projects despite the global economic crisis, yet he underlined Kingdom's mega projects would not be enough on their own to meet the world's energy needs.

Others need to come on board too. No one could argue that. Already projects are taking a hit all around. And in an evolving scenario nothing could be taken as granted.

Eyes are focused on OPEC's resolve and ability to stem the tide. At stake is its credibility.