‘’Beautiful'’ was the succinct summation of the oil market Saudi Arabian Oil Minister Ali Naimi offered earlier this week. Naimi, OPEC’s de facto leader, was referring to prices stabilizing at around $50 for OPEC’s reference basket of crude and around $57 for the U.S. benchmark , with global inventories at what he reportedly called ‘’comfortable'’ levels.

So why would the market believe that OPEC’s position is essentially: You’re Beautiful! Now Change?

That kind of thinking can do more than just get you in trouble with your significant other. For the oil market, the damaging confusion comes in trying to balance Naimi’s comments with the remarks of Kuwait’s oil minster, whose words perhaps carry a mistakenly loud echo because he currently holds the title of OPEC’s president.

Sheikh Ahmad al-Fahd al-Sabah, the Kuwaiti, who will host OPEC’s Dec. 12 talks at which no formal change in oil production policy is expected, has said in recent days that OPEC wants to see global inventories rise.
The Kuwaiti said he has support for keeping OPEC’s official output ceiling unchanged and an additional 2 million barrels a day of production on offer, if needed. He also said he would be comfortable with commercial oil inventories in the major industrial countries holding 56 days of forward demand cover by the end of the first quarter.

According to the International Energy Agency, commercial stocks stood at 52 days of forward demand cover at the end of September. That means stocks would have to rise even as global oil demand in 4Q ‘05 and 1Q ‘06 rises by more than 2.5 million barrels a day from the third quarter and OPEC output has held fairly steady.

What’s more, al-Sabah’s 56-day comment was a rehash of a statement he made in mid-June that seemed out of the OPEC mainstream when he first uttered it . Since then, commercial stocks in the industrial countries fell to 52 days of forward cover from 53 days.

Commercial stocks haven’t been at the 56-day level since 2Q 2002, IEA data show. And stocks haven’t risen in the first quarter from the fourth quarter by anything close to the 4 million barrels the Kuwait is targeting, since 1996. Oil prices fell by 7% in that period, which would translate to a drop of more than $4 a barrel to near $55 today.

The market reality is likely to be that - with the Saudis content with the status quo - OPEC output may creep up slightly as winter demand emerges, but there won’t be any overt, full-throttle production rise, barring some major catastrophe in a producing country. That means commercial stocks will grow and oil prices will ease only by the extent that demand drops off at the end of winter.

Beauty is indeed in the eye of the beholder and part of the beauty of OPEC’s machinations in its 45-year history is that it’s never crystal clear what the group’s precise aims are.

At such times, bet on the Saudi view to prevail. And Naimi thinks things are beautiful.

He may do well, though, to recall Socrates, who said: ‘’Beauty is a short-lived tyranny.'’