E-Paper
OPEC struggles to find balance in oil market
Oil ministers from the Arab oil producing countries started their meeting in Cairo on Saturday ahead of an emergency gathering of the more powerful OPEC oil cartel in effort to stem plunging oil prices.
Oil ministers from the Arab oil producing countries started their meeting in Cairo on Saturday ahead of an emergency gathering of the more powerful OPEC oil cartel in effort to stem plunging oil prices.
The representatives of the Organization of Oil Exporting Countries face their third test in as many months to engineer a rebound in prices hammered by plummeting crude demand amid a global economic meltdown.
This meeting will come down to what Saudi Arabia, the kingpin and traditional price dove in a group that supplies 40 percent of the world's crude oil, wants, say experts.
The Saudis have been quiet going into the meeting, not indicating whether they will agree to the production cut being pushed by more hawkish members of the group like Iran on Venezuela. On Saturday morning, however, an interview with Saudi King Abdallah appeared in the Kuwaiti daily Al-Seyassah in which he said oil should be price at $75 a barrel, far above its current rate. "We believe the fair price for oil is $75 a barrel," he said, without elaborating on how this would be achieved. Whereas crude stood at about $147 a barrel in mid-July, it now hovers about $90 lower. On Friday, the U.S. benchmark West Texas Intermediate crude for January delivery was trading at about $54 per barrel. The cartel, whose next scheduled meeting is on Dec. 17 in Algeria, has already held one emergency meeting _ on Oct. 24 in Vienna _ to try to halt the slide in prices with an announcement of a 1.5 million barrel per day drop.
It failed to support prices, and the cartel hastily convened the Cairo gathering on the sidelines of the Organization of Arab Petroleum Exporting Countries' meeting.
The outcome of the meeting likely hinges on a key issue with which OPEC has long had a checkered past: unity.
"There is total confusion" among OPEC's 13 members, said Fadel Gheit, managing director of oil and gas research at Oppenheimer & Co. in New York. "These people ... really have no business model. They basically thrive when oil prices go up, and now they are crying uncle when prices go down."
And, down they have gone, in a financial avalanche triggered by demand destruction, itself sped along by a world financial meltdown that also threatens to cut deeply into OPEC member states' government budgets.
But ministers arriving Friday in Cairo were reticent. Saudi oil minister Ali al-Naimi said the cartel would issue an announcement on Saturday and declined to indicate which way they were leaning. Kuwait's oil minister Mohammed al-Aleem said he believes there was "no need" for OPEC to take a decision in Cairo on cutting output. But he warned the market is oversupplied, and didn't rule out the need for OPEC to cut production further.
"We believe a decision could be taken ... but I think it will happen in Algeria," he said.
Al-Aleem said current prices could undercut investment in future projects and were not good for either producers or consumers. The recent price drop has left price hawks Venezuela and Iran clamoring for further reductions of at least 1 million barrels a day. Both countries need crude of about $90 per barrel to meet current spending needs aimed in part at propping up domestically unpopular regimes.
Other OPEC members, such as Nigeria and Ecuador, face budget problems too, making them reluctant to implement more cuts that might shrink revenues further.
Unlike many of their fellow members, the Saudis are better positioned to cope with the drop in prices. The International Monetary Fund estimates Riyadh needs crude in the range of about $50 per barrel for 2008 fiscal accounts to break even. Also unclear, after two earlier cuts failed to push prices higher, is what the group can do without prolonging the global economic downturn.
OPEC itself, along with the International Energy Agency, has significantly revised down its projections for demand growth in 2009.
Meanwhile, global crude inventories are growing, as evidenced by a U.S. government report showing a surprisingly large 7 million barrel build in stocks last week in the world's largest energy consumer.
OPEC's last round of cuts would put its total production at about 30.5 million barrels per day, according to the IEA. That is about 500,000 barrels per day higher than the forecast call on OPEC crude in much of 2009.
Those factors argue against restraint if some in OPEC want crude back up to at least $70.
A Nov. 24 Oppenheimer research report says that for oil to rebound to $65 a barrel, OPEC would need to cut crude production by more than 3 million barrels per day from its September levels _ a move it called highly unlikely.
