VIENNA – Oil powerhouse Saudi Arabia spoke out Wednesday against reducing OPEC’s output – the latest sign that the 12-nation cartel will keep production at present levels. But instead of falling on the news, crude prices climbed to six-month highs.
Even before Saudi Oil Minister Ali Naimi spoke, the recent jump in oil prices was working against hardline OPEC members who were advocating even costlier crude. Naimi’s comments reinforced expectations that OPEC oil ministers meeting Thursday would decide to not change oil production levels. The Saudis account for close to a third of OPEC’s total production and what they say is usually informal policy for the rest of bloc.
“There is no need to cut production,” Naimi told reporters, adding the group should “stay the course.” He said oil prices would likely reach around US$75 a barrel by the end of the year due to growing demand in Asia.
OPEC’s president indicated a decision already had been reached even ahead of Thursday’s formal meeting. Asked if he expected only brief consultations on Thursday, Jose Maria Botelho de Vasconcelos, who is also Angola’s oil minister, replied “yes.”
With oil plentiful and demand slack, expectations that OPEC will continue pumping at present levels normally would push prices downward. Instead, benchmark crude for July delivery was up 39 cents to $62.84 a barrel by mid-afternoon in Europe Wednesday in electronic trading on the New York Mercantile Exchange. Earlier in the session, the contract reached a peak of $63.45, its highest level since mid-November.
The upward trend appeared due to optimism that the U.S. – the world’s largest oil consumer – is emerging from a severe recession. Oil investors took heart from Tuesday’s report from private research group The Conference Board that showed U.S. consumer confidence in May soared to its highest level since last September.
The Saudis have said they can live with oil at $50 a barrel, while supporting the general view of the Organization of the Petroleum Exporting that prices of $75 to $80 are needed over the longer term. Price hawks Venezuela and Iran, the No. 2 OPEC producer, have been the most vociferous in support of those levels ahead of the meeting.
The steep slide of crude from its 2008 peaks of $147 a barrel – and resulting Iranian economic hardship – is believed to be hurting President Mahmoud Ahmadinejad’s re-election chances. Oil Minister Gholam Hossein Nozari said in March that his country was diverting funds from other sectors of its national budget to support its oil industry, its main revenue source.
Staking out Iran’s position ahead of Thursday’s meeting, Ahmadinejad recently said $80 to $90 a barrel was “a suitable price for oil.” And Rafael Ramirez of Iranian oil ally Venezuela said he expected prices near $75 a barrel by year’s end – still more than $10 above present levels.
“That price is necessary for … investment” in the industry by oil producers, he told reporters.
Still, the already strong recovery in prices has given support to calls for keeping production levels unchanged.
A barrel of crude now fetches more than $60 compared to levels near $30 just four months ago. And that spike has come despite continued anemic worldwide demand and gloomy future forecasts – Naimi on Wednesday suggested greater demand later this year would come only from Asia, with the U.S. and Europe continuing to lag.
OPEC’s May estimate in fact predicts that demand for its crude will decline by over two million barrels a day this year.
Instead of being powered by demand, oil prices have risen because of international stock markets. But stocks normally rise months ahead of actual growth in industrial production, reductions in unemployment rolls and other signs that a recession is over.
Thus, any move by OPEC to scale back output levels to prop up prices could backfire – both in terms of prolonging the recession and thereby depressing demand and by deepening perceptions that OPEC is bent on enriching itself at the cost of the rest of the world.
Cuts agreed on since September were meant to take a daily 4.2 million barrels off the market. But the 11 members under production quotas are still overshooting their joint daily target level of just under 25 million barrels by more than 800,000 barrels a day.
While 100 per cent compliance with quotas is unlikely, even an additional 10 per cent compliance would take more than 400,000 barrels a day off markets, slicing into oversupply while reducing the price shock that an outright cut in existing quotas would cause.
Thursday’s meeting is likely to opt for nothing more drastic than renewing calls on members to slash overproduction and warning that OPEC is ready to call for an emergency meeting should prices slide suddenly.
JBC Energy in Vienna, however, said the huge global stocks of oil could lead to a future OPEC output cut.
“If the group sticks to its current production target on Thursday it is very likely they will have to reduce output at a later meeting,” JBC said.