The contention of many industry players, including the Organization of the Petroleum Exporting Countries (OPEC), that rising global demand for crude will more than make up for increased production by some countries was dismissed outright on Wednesday when the International Energy Agency trimmed its 2018 world demand growth projection by 40,000 barrels per day (bpd) to 1.4 million bpd, projecting total consumption at 99.2 million bpd.
Although the IEA conceded that the global economy is robust, it pointed out that oil prices have risen about 75 percent since last June, and "it would be extraordinary if such a large jump did not affect demand growth."
The agency added that developing nations that phased out fuel subsidies when prices were lower are especially sensitive to the high prices; it also noted that the "effect of higher prices should in particular become apparent in gasoline demand in the next few months."
Unnamed OPEC source
Prices are high just because of the [geopolitical] tensions
In addition, the high oil prices prompted the IEA to increase supply growth estimates for non-OPEC member producing countries, particularly the U.S., by 1.87 million bpd this year - 85,000 per day more than previously thought.
Unsurprisingly, on the same day the agency delivered its dire forecasts, OPEC downplayed the price rally and indicated it would not relax its production curbs, stating that crude even at $79 is "not yet" too high.
That was the contention of four OPEC delegates speaking to Reuters on condition of anonymity; they argued that "prices are high just because of the [geopolitical] tensions," and that prices "may exceed $80 and then go down."
Of course, it's commonly known that OPEC wants to maintain its output cuts to drive prices higher and thus improve the economies of many member countries; Saudi Arabia is OPEC's leading supporter of measures to boost prices, and it is said the kingdom would be happy to see crude rise to $80 or even $100.
The sources went on to remark that only data pointing to a supply impact would cause the cartel to consider relaxing its restrictions, and on that score both OPEC and the IEA expressed their concern for the potential of production woes in Venezuela and the reimposition of sanctions in Iran to cause a sudden market tightening.
These ruminations may presumably cause those keenly attuned to the cycles of a free market to wonder what the fuss is about: if the IEA's prediction of supply growth comes true, it would be the antidote to the high crude prices it is worried about; and if a sudden tightening of supplies comes true and prices spike even higher, then OPEC and other countries seem ready to bring more product to the market.
The most unlikely source of reason in the analytical debate over crude on Wednesday was Iran, whose oil minister Bijan Zanganeh told media that prices at $60 to $65 was "logical"; a source explained this mindset by pointing out, "When oil prices rise due to geopolitical concern and not due to demand and supply and fundamentals, it cannot be reasonable."
But even such words of wisdom must be carefully considered in light of the unreliability of the source: Iran has persistently sought to pump all out regardless of the global consequences, yet Zaganeh for whatever reason has been trying to reinvent himself as a voice of moderation, declaring that reasonable oil prices would "prevent global markets from plunging into instability."