Analysis: OPEC looks on calmly as oil price falls

Oil traded at below $120 a barrel on Friday, down from a July peak of $147.27 as soaring fuel prices and an ailing economy have cut consumption in the world’s largest energy consumer the United States.

Members of the Organization of the Petroleum Exporting Countries (OPEC), source of more than a third of the world’s oil, have shown scant concern. “At the moment, and at this level, there is no movement within OPEC to do anything,” an OPEC source told Reuters this week. “I don’t think ministers will change output. I think at less than $80 for OPEC oil, maybe they would do something.”

OPEC has been reluctant to disclose a target oil price, but even members of the group who have traditionally favored higher prices have said they would be comfortable with a market below current levels.

Venezuelan President Hugo Chavez earlier this week described oil’s decline as “a good thing” and has repeatedly said $100 was a fair price for oil. OPEC President Chakib Khelil said prices were abnormal last week, when a barrel cost around $123. He said the price could fall to $70 to $80 a barrel in the long term.

“There’s some realism and pragmatism in these comments,” said PFC Energy’s David Kirsch. “Exactly as they didn’t think they could control the pace and magnitude on the upside, they don’t think they can control the downside, so they may overshoot if they draw a line in the sand at say $100.” Other analysts drew the line at slightly different levels. “They are not concerned,” said Johannes Benigni, managing director of Vienna-based JBC Energy. “Maybe at below $105 they might do something. They won’t want to see the price below $90.”

Although the market has switched into bearish mode for now, few are expecting it to crash as oil exports remain vulnerable to supply disruption and demand from emerging economies led by China is expected to offset lower consumption in the West. A Reuters survey of analysts has predicted US crude CLc1 will average well above $100 for the rest of the year [O/POLL], with consumption expected to increase in the peak demand Q4.

Some technical analysts, who use charts to predict future price movements, have said the market could fall as far as around $60 before the long-term bull trend was broken. The pause in the rally has alleviated political pressure that oil exporters have faced from consumers. Record fuel costs have triggered global protests this year and stoked rising inflation.

To address what it described as unacceptably high prices, top oil exporter Saudi Arabia hosted an emergency meeting of consumers and producers in June, and in July it boosted output to the highest level in 27 years. It said the increased output was in response to customer demand. In addition, the rise has helped stocks to build, with a moderating impact on prices.

Saudi King Abdullah said in an interview with Italian newspaper La Repubblica in July 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 hovering at around $100. Producers could well be nervous about the impact on demand of very high prices and the huge boost in revenue they have already received means they can afford a price fall.

To date this year, oil prices have averaged more than $114 a barrel, up $50 dollars a barrel from just under $64 in the same period last year. A fall to $80 for the rest of the year would still give a full year average of $100, more than enough for even the biggest OPEC spenders such as Venezuela to balance their books. (Reuters)