OPEC cut won't shore up crude prices, analysts say

Gas prices have started to drop below $3 a gallon in parts of the United States.

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October 22, 2008 09:30
4 minute read.
OPEC cut won't shore up crude prices, analysts say

gas good 88 224. (photo credit: Ariel Jerozolimski)

 
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A production cut of even 1 million barrels per day at OPEC's upcoming emergency meeting is unlikely to reverse slumping crude oil prices in the short term, said analysts Sunday, amid mounting calls by several cartel members to keep prices at the $80 per barrel level. The Organization of Petroleum Exporting Countries' decision to hold an emergency meeting Friday clearly signaled the group's concern that crude's recent pummeling would siphon revenue necessary to sustain government spending and weather broader fallout from the current global financial crisis. The meeting had initially been moved up to mid-November, about a month earlier than scheduled, but was pushed to Friday as the oil price dropped below $70 per barrel. Analysts said some key producers may be eying the meeting as the first step in reasserting control over the market - particularly as the cartel has argued that record rallies earlier this year were driven more by speculation than supply and demand. "What they really want to do is position themselves now in a situation where they can manage markets ... a lot more comfortably next year, and potentially for the recovery in 2010," said Raja Kiwan, a Dubai-based analyst with the Washington-based oil consultancy, PFC Energy. Kiwan and other analysts expect the 13-member group, which produces about 40 percent of the world's crude, to slash production by at least 1 million barrels per day as they look to buoy a market in which the price of a barrel of the benchmark West Texas Intermediate crude has fallen about 50 percent from record highs of $147 in July on the New York Mercantile Exchange. Over a three-day period last week, the November-delivery contract on the Nymex dropped $11 per barrel, rebounding slightly on Friday only on the back of OPEC's announcement of the emergency meeting. But even that gain could be short lived, say some analysts, as the market factors in the anticipated cut ahead of the meeting. "In the very short-term..., OPEC will likely prove unable to significantly alter the prevailing market sentiment, particularly as crude traders look to equities as a barometer of global economic health [and hence oil demand]," said a recent PFC Energy report. That presents OPEC with a dilemma. If they announce too big a cut, they risk fueling the global financial crisis. But, cut too little, and $80 per barrel will be wishful thinking. Some OPEC officials have said prices closer to $100 per barrel are ideal. "I don't think there's been this sense of urgency since the Asian financial crisis," said Kiwan, referring to the market collapse in Asia in the late 1990s. "I think those memories are still seared into the minds of [OPEC] ministers." Independent Kuwaiti oil analyst Kamel A. Al-Harami agrees and argues that given such a delicate balancing act, disagreements are likely at the meeting between dovish Saudi Arabia and traditional price hawks like Iran. Even if the members agree on a production cut, 1 million barrels will not be enough and "there will be cheating on the quotas from day one," said Al-Harami, who served as former president of Q8, the retail arm of the Kuwait Petroleum Corp. Al-Harami believes the group is being hasty in moving to cut production and believes they should hold off until at least the winter, when demand for energy for heating picks up. But OPEC is making it clear that the time for waiting is over. Chakib Khelil, Algeria's oil minister and OPEC's current president, said over the weekend that the cartel "is going to take the decision that favors keeping market prices stable." "There will be a reduction, and it is necessary that it's significant to establish balance between supply and demand," Khelil was quoted as saying by the country's APS news agency. The stakes are high - both for a meaningful production cut and for quota compliance, something on with which OPEC has typically fared poorly. Over the past few weeks, the slide in prices has become even more pronounced as the global financial crisis sapped demand for crude oil in the developed countries. The International Energy Agency, the US Energy Information Administration and, most recently, OPEC have all revised down their forecasts for energy demand heading into next year. Such revisions, in tandem with the price drops, are particularly worrisome for some top producers like Iran - the cartel's second largest crude exporter, which relies on oil revenue for about 80% of its government budget. Iranian officials have repeatedly said crude at $100 seems fair. Others, including Qatar's oil minister and Venezuelan President Hugo Chavez, have pushed for levels closer to $80-90. Iran and Venezuela, in particular, have reason for concern because their production is heavier and more sulfurous and, as a result, sells at steep discounts to lighter crudes like the US benchmark WTI. The OPEC basket - the weighted average of prices for crudes produced by OPEC countries - stood at $63 per barrel on Friday, according to Kiwan. The Saudis have so far stayed quiet. But analysts said Riyadh is well tuned in to the fact that developing nations, in particular, will not be silent if presented with steep cuts that could undermine US and European-led efforts to stave off a global recession and shore up financial markets. PFC Energy's Kiwan said while other cuts could follow the expected 1 million barrel per day reduction, the immediate focus is on halting the steep price decline. "One of the keys here is that OPEC is not judging its failure or success on the short-term," he said. "What it's hoping to do is provide fundamental support for recovery in the long-term," a plan which requires them to keep supplies tight going into next year. Ultimately, added Al-Harami, "the biggest player is Saudi, and what Saudi decides, the others have to follow."

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