Saudi Arabia, the world’s top oil exporter, may come under pressure from within OPEC ranks to reduce supplies to prevent a further fall in crude prices when the group meets on September 9.
While OPEC is unlikely to change its official supply target at the meeting in Vienna, it is pumping almost 1 million barrels per day (bpd) more than the target largely because of an increase from Saudi Arabia. The extra Saudi oil and declining demand from slowing economies in the West have helped lower prices to $117 a barrel from a record high of $147.27 in July. The drop has prompted OPEC price hawks Iran and Venezuela to suggest a cut in supplies.
“I think there will be pressure on Saudi Arabia to rein in some of its recent unilateral increases,” said Julian Lee, analyst at the London-based Centre for Global Energy Studies, adding “It all depends on what level of prices Saudi Arabia wants to see.”
Saudi Arabia, the only producer with any significant spare capacity, has not said in public what the Organization of the Petroleum Exporting Countries should do at the meeting, its first since March. The group, which pumps two in every five barrels of oil, is likely to stop short of cutting its formal supply target because fuel demand rises in the Q4 due to winter and such a move would anger consumer nations. “It would be politically difficult for OPEC to push through anything formal,” said Catherine Hunter, energy analyst at Global Insight in London, adding “But that does not rule out them trimming physical supply.”
To address what it described as unacceptably high prices, Saudi Arabia hosted a meeting of consumers and producers in June, and in July boosted output to 9.7 million bpd, up from its informal OPEC target of 8.9 million. The decline in prices from last month’s record of around $147 per barrel to about $115 has come as a relief to consumers and businesses paying high fuel costs. Even after the drop, the price of oil remains historically high — up from $20 in 2002.
Iran and Venezuela, political foes of the US and who need high oil prices to fund domestic spending programs, often voice support for measures likely to bolster oil prices. “It’s no surprise these suggestions are coming from Venezuela and Iran,” Lee of the CGES said, adding “They are countries with desperate need for oil revenues, and I’m sure they’ve got used to the revenues they were getting at $145 a barrel.
By contrast, OPEC’s Gulf members led by Saudi Arabia and Kuwait, both with close ties to Washington, have tended to tread a softer line on prices. Kuwait joined Saudi Arabia to boost its oil output in July, although Kuwait has since trimmed supplies, the chief executive of Kuwait’s state oil firm said on Monday.
OPEC’s production remains much higher than its target, according to industry estimates, leaving plenty of surplus that could be quietly removed should prices or demand fall sharply. In August, OPEC is pumping almost 1 million bpd more than its target of 29.7 million bpd, according to Petrologistics, a consultant which tracks OPEC supply. The target covers 12 of OPEC’s members, all except Iraq.
Saudi Arabia and OPEC have been careful to avoid stating a price that they would defend. But there are some indications that oil has yet to approach a level that would worry OPEC. An OPEC source, who declined to be identified because of the sensitivity of the issue, told a news agency earlier this month that the group would probably not react to lower prices until they fell below $80. Saudi King Abdullah was quoted in July as saying he wanted to see lower prices, without stating the desired level. He said that the kingdom was “already unhappy” with the rising price when it was around $100. Leaving supply targets unchanged on September 9, as OPEC did at meetings earlier this year, would still allow for low-profile adjustments in supply to meet changes in demand or price.
Some analysts question whether any supply cuts are needed yet, given lower-than-expected supply from producers outside OPEC and relatively robust demand in regions such as Asia. “The recent increase in production from Saudi Arabia was not well received by some of the more hawkish members of OPEC, though it really just offset contractions in supply in non-OPEC countries in the H1 of 2008,” said Harry Tchilinguirian of BNP Paribas. “In all likelihood, OPEC could end up maintaining the status quo.” (Reuters)