Commodities | Apr 06 2006
April has been a volatile month for the oil price, with Barclays Capital suggesting technical trading is responsible for at least a portion of the recent volatility.
But regardless of the short-term fluctuations caused by technical trading there is a fundamental factor influencing prices in Barclay’s view, which is the market remains fundamentally very tight in fundamental terms and so prices are subject to larger moves on any news.
Currently the focus is geopolitical issues, as ongoing militant action in Nigeria has seen that country lose as much as 250,000 barrels per day (bpd) of production, which is continuing the recent trend of OPEC production declining.
Figures suggest OPEC production has fallen below its target, which is currently 27.9mbpd, for the first time since early in 2003, primarily because of a lack of excess capacity.
As Barclays notes only Saudi Arabia has significant excess capacity currently, while Nigeria, Iraq, Indonesia and Venezuela essentially have no capacity to lift production in the short-term.
For Venezuela the situation may be even more serious, as market commentator Dennis Gartman suggests its production levels look set to decline in coming months as the state has retaken control of production facilities previous run by Italy’s ENI and France’s total. In Gartman’s view this means production in coming months will likely fall short of current levels, as he regards it as almost as certain as death and taxes that state run production facilities are not as efficient as company-run facilities.
This means the market is likely to remain tight, especially leading into the US summer season where typically demand for oil spikes higher. With the hurricane season coming closer again and some experts suggesting another year of potentially damaging storms are likely, any loss of production will place pressure on prices given total Barclays estimates total space capacity among OPEC members is about 1.7mbpd, of which the Saudi’s control 1.5mbpd.