February 12th, 2010
11:50 AM GMT
As a cub financial journalist, the first theory one must understand is that of supply and demand. At its core, the model is based on price, usage of product and its availability. The price will fluctuate according to supply and demand.
However, in this world of record stimulus plans, solid growth on one side of the world – the East – and anemic growth on the other – the West - putting this theory to the test is more difficult, and even more so when you talk about oil.
That is where the Iran factor comes into play. Oil quietly rallied over the past week as Iran raised the stakes over uranium enrichment, preceded U.S. military’s precautionary air and sea security plan in the Gulf.
All of a sudden, supply and demand is not the order of the day, rather supply and security. Dig a little deeper and you will find that supplies are running six percent above the five-year average. There is plenty of crude in storage and floating in barges at sea.
The market has been supported by expectations for a second-half recovery and whether it won’t just be Iraq, Afghanistan and Yemen to worry about but Iran as well.
During an interview with Abdalla Salem El-Badri, the OPEC Secretary General, we covered supply and security and it is fair to say he shares concerns about both. Iran is producing nearly four million barrels a day. When asked about his thoughts on moves to secure the region, without hesitation he said, “I don’t think we need any problems in that area. We have to be very careful. Things could collapse there.”
He was also careful to say he is not speaking as a government official or minister, but the secretary general touched upon similar concerns shared by business and government officials - that they fear the situation will only escalate.
U.S. President Barack Obama says the door is still open for talks, but a plan for stiffer economic sanctions is on the way and it will further isolate Iran from the international community.
This high-stakes diplomacy is taking place in a climate of tepid growth, based on record government intervention in OECD countries, especially in the U.S. and UK.
Badri, like many others who are watching supply and demand carefully, suggested policymakers should tread carefully when removing their economic support.
“This exit should be very carefully done because this exit will have an impact on growth itself and on demand. The first and second quarters will be very difficult, demand will pick up in the second half if we are careful to exit at the right time.”
Oil producers, especially those in the Gulf where costs are lower, are benefiting from a price band of between $70-80 a barrel, which Badri believes will last through 2010.
Demand for OPEC crude is running at about 29 million barrels a day, three million below the peak in 2008. He does not see that level of demand returning for another two to three years.
The International Energy Agency decided to boost its forecast slightly for this year based on stronger than expected growth in emerging markets. They too see that the industrialized countries of the OECD “will face considerable uncertainty.”
The European Union is trying to work through its Southern Mediterranean crisis, while Britain is dealing with extremely high levels of debt and so is America.
The supply and demand theory is functioning just fine at this point in time, but there are many moving parts that can throw it off-kilter and bring prices below the current comfort zone for Middle East producers.
Then there is security and the “Iran Factor,” which remain too difficult to gauge. As a key producer with the third highest proven reserves, worries over security and market uncertainty seem to be playing in its favor.
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