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OPEC accommodates investor demand

By keeping production targets unchanged despite swelling inventories and uncertainty about the outlook for oil consumption, OPEC has decided to accommodate rather than fight investors’ demands for a high level of inventories.
Forward cover has crept up to 62 days, well above the long-run average of 52-53 days OPEC members have previously indicated is their target, consistent with stable prices. But further cuts were never seriously on the agenda at this meeting, and seem unlikely to be seriously considered at the next one in December unless there is a shift in sentiment and a price collapse in the meantime.

While spot prices are less than half last year’s peak, they have rebounded to a level that was unprecedented before 2007. Ministers must be amazed at their good fortune, with prices at historically high levels amid the deepest global downturn since World War Two.

More importantly, the cartel is keeping a wary eye on the Copenhagen climate conference in December. Key members, led by Saudi Arabia, are anxious to avert a repeat of last year’s vertiginous price spike and the bout of demand destruction that came with it.

Being seen as a responsible supplier of energy is especially important now, with consumer countries about to take decisions on conservation and substitution measures that will have profound impact on demand for OPEC’s output for decades to come.
Producers therefore had little choice. So long as investors demand a high level of stock to alleviate fears about a future supply crunch, OPEC’s task is to accommodate them. Cutting output to force inventory levels back down to long-run averages would risk triggering another sharp rally, reigniting consumer demands for tough climate measures to reduce dependence on “unreliable Arab oil”.