Oil Prices Over $80 A Barrel Unsustainable-Iran OPEC Governor

TEHRAN -(Dow Jones)- A senior Iranian oil official said Sunday that market fundamentals won’t support crude oil prices to record levels above $80 a barrel in the coming months due to the phenomenon of backwardation.

Backwardation is when current prices exceed future ones and thus encourage refineries to consume their reserves with the idea of replacing them with cheaper oil in the future, said Iran’s Organization of the Petroleum Exporting Countries Governor Hussein Kazempour Ardebili, the semiofficial ISNA news agency reported.
Due to the effects of backwardation demand for oil diminishes and the price drops.

OPEC’s decision earlier this month to raise production by 500,000 barrels a day from November to placate consumer concern over high prices, which led to a surge in oil prices from around $78 a barrel at the time of the group’s meeting to above $84 a barrel earlier this week, was a temporary hike, he said. He said apart from backwardation, which is a market characterization under the current conditions, the oil market is normally a place where the price of a commodity for future delivery is higher than the spot price.

OPEC assigned quotas, Kazempour said because of the surge in prices and the existence of additional demand in the market, the member’s quota compliance fell 50%. This was worrisome from the point of view of discipline, since the extra production wasn’t divided proportionate to the quotas, consequently impacting cohesion among the members.

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