Opec took the world by surprise on Wednesday when its meeting ended in chaos, and was described by the Saudi oil minister as the "worst in Opecs history". The market naturally reacted with panic, sending the Brent crude oil price to $119/bbl - a $2/bbl increase in a day.
The development has come as a blow to developed economies who were hoping for the Opec to agree on raising production for the rest of 2011.
A divide in opinions amongst Opec members was always there but it never resulted in such disarray in the past 20 years. Now that it has, analysts around the world are tipping it as a big moment for Opecs future. The consequences seem to be graver than just a short-term price increase, as a number of experts now believe Opec is fast heading towards disintegration.
And if Opecs future turns out to be as bleak as is being tipped, the world should be ready to pay even higher prices for oil as it would not only adversely affect the supply projections, but will also add more uncertainties - both of which attach high premiums.
Ever since the MENA crisis worsened, Saudi Arabia has raised its production bar, by pumping more oil to cover for the Libyan loss. Now that the unrest has taken over Yemen and Syria as well, concerns over Saudi Arabias ability to bridge the widening gulf between demand and supply, have also grown.
"The decision indicates several Opec members do not have much spare capacity to supply a market where demand from Asia continues to be strong," said a research note by JP Morgan. It added that oil price would stay over t$100/bbl in the near term and could go to its previous 2008 highs in the long-run.
The general view amongst experts is that most of the Opec members are refraining from increasing their outputs because they want to avert a crisis-like situation in their respective countries, as a dip in oil prices would not give them room to subsidise food for their masses. It is widely believed that supply will continue to face pressure as long as dark clouds of potential unrest loom over the region.
The US Energy Information Administration, EIA, has also maintained its high future price projections, ruling out the possibility of oil under $100/bbl anytime soon. The EIA estimates the Opec surplus capacity to fall by a further 0.4 million bpd during 2011 and a further slump of 0.5 million bpd by 2012.
Opecs future will make for an interesting story. However, mere demand projections will likely share the limelight with cartel formation, political situations and uncertainty premiums which will act as a triple-hit combo in oil price determination.
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