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 (East) and anemic growth on the other (West) putting this theory to the test is more difficult, even more so when you talk about oil.
That is where the Iran factor comes into play. Quietly oil rallied over the past week as Iran raised the stakes over uranium enrichment, preceded by an air and sea security plan in the Gulf by the US military as a precautionary measure.
All of a sudden, supply and demand is not the order of the day but rather supply and security. Dig a little deeper and you will find that supplies are running 6 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 4 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 ‘careful’ to say he is not speaking as a government official or minister, but the Secretary General touched upon similar concerns shared over dinner or tea by business and government officials, that they fear the situation will only escalate.
US President Barrack Obama says the door is still open for talks, but the plan for stiffer economic sanctions is on the way to 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 US and UK.
Mr El-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 pickup 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 El-Badri believes will last through 2010. Demand for OPEC crude is running 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, Britain extremely high levels of debt and ditto for 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 the 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 to its favor.
John Defterios is CNN’s anchor for Marketplace Middle East. Tune in Fridays at 11:15 and Saturdays at 9:15. For more information go to www.cnn.com/mme.
