OPEC’s Rising Oil Production Could Push Oil Prices Lower
By pumping far more oil than its quotas allow, OPEC could flood the market and lower oil prices. (image: wsj.net)
Oil production in OPEC grew in May even as the price of a barrel of crude fell from a high above $87 towards $70. With OPEC members in violation of their quotas, and the cartel as a whole exceeding its production target by roughly 2 million barrels per day, OPEC could increase oil supply enough to lower oil prices, possibly even forcing the price of crude oil below the group’s target range of $70–$80 a barrel.
The news site 24/7 Wall St. reports that OPEC’s total production hit a 17-month high in May, with all OPEC members exceeding their quotas. OPEC members have boosted production to chase the profits that come with high oil prices, and with crude prices in the low $70s per barrel there is little incentive for individual members to cut back.
Growing production can sometimes run up against the limits of storage, both onshore and offshore, but there’s more storage available now than there was a year ago. According to the Danish shipping company A.P. Moller-Maersk, cited by 24/7 Wall St., there are 25 oil tankers being used for floating storage—at this time last year there were double that number.
With room to store the oil and profits to be had, OPEC could continue to produce oil well above its quota. A greater supply of oil would pressure oil prices to fall, but there is likely a floor for crude oil prices below which OPEC would take decisive action to curb production.
According to Dow Jones Newswires, that floor is $65 a barrel. Working with slightly different figures than 24/7 Wall St.—OPEC’s workings are far from transparent, so no definitive data are available—Dow Jones believes OPEC is showing some restraint, though the news service still says that the cartel’s total output increased by 1.9 percent in May. By their calculations, most of that increase came from Iraq, whose production is not currently bound by a quota.
From the perspective of the market, though, it matters little whether a barrel of oil came from Iraq or the United Arab Emirates—supply is supply, and if production grows more quickly than demand, oil prices could fall. Though OPEC would not stand still and let oil prices collapse, heating oil users could benefit from the current lack of compliance by OPEC members through lower crude and heating oil prices.
OPEC Could Cut Production if Oil Prices Continue Their Slide
Crude oil prices below $70 a barrel could trigger an OPEC meeting (like the one pictured above) and stricter enforcement of production quotas. (image: AP via sulekha.com)
Just over one month ago, when oil prices were rising, Kuwait’s oil minister said that OPEC wouldn’t consider increasing oil production to combat high oil prices that could threaten economic recovery until the price of crude oil hit $100 a barrel. Now that crude oil prices have declined by 17 percent in May, even falling below $70 a barrel at times on Monday, BusinessWeek reports that oil analysts are wondering when OPEC will cut output to prop up oil prices.
For months OPEC has affirmed its satisfaction with current oil prices. In December, Saudi oil minister Ali al-Naimi said oil prices between $70 and $80 a barrel were “perfect,” and OPEC general secretary Abdalla El-Badri has said that prices between $70 and $90 a barrel provided incentive to producers to expand production without being so high that they would force people to cut consumption. A price below $70 a barrel “does not give [OPEC members] an incentive to invest,” said Qatari energy minister Abdullah bin Hamad al-Attiyah on Monday. Kuwaiti minister Ahmad Al-Abdullah Al-Ahmad Al-Sabah said that if crude oil hit $65 a barrel it would “ring a bell” for OPEC to act before their next scheduled meeting in October.
Though OPEC has not changed its production quotas since December 2008, when it cut output sharply because of lost energy demand during the recession, compliance with those quotas has eroded as members ramp up production in pursuit of greater profits. If OPEC decided to restrict oil supply and keep prices high enough to encourage further oil exploration, the cartel could do so simply by enforcing existing quotas rather than changing quota levels.
These recent statements by OPEC members effectively put a price floor of $65–$70 on crude oil. While heating oil users can expect lower prices as falling prices on the NYMEX translate into lower retail heating oil prices, OPEC stands prepared to limit how far oil prices may fall. Having survived the 2008 collapse in oil prices when crude oil traded for as little as $33 a barrel, OPEC is determined not to let prices reach those lows again. For heating oil users, that means the ultra-cheap heating oil of a little over a year ago may not soon return.
Oil Prices Climb After OPEC Increases Forecast for 2010 Oil Demand
Oil spills, debt crises, and volatile prices have not dampened OPEC’s optimism on oil demand in 2010. (image: wikimedia.org)
While oil traders evince jitters over the debt crisis in Europe and the oil industry tries to withstand the negative publicity of the BP oil spill in the Gulf of Mexico, OPEC remains unruffled and has even raised its forecast for global oil demand in 2010. Their confidence influenced oil markets, and pushed up the price of crude and heating oil on Tuesday morning.
As Reuters reports, this the third consecutive month in which OPEC has raised its forecast for oil demand. In its latest monthly report, the oil cartel said that 2010 oil demand would rise by 950,000 barrels per day (bpd) from 2009 levels. That prediction is 50,000 bpd higher than OPEC’s previous forecast.
“The recent signs of improvement in the global economy have been encouraging,” said OPEC, affirming the conventional wisdom that economic recovery will lift oil demand in 2010. But OPEC also stated that rising oil demand could be reversed if oil prices, and especially the price of gasoline, moved too high:
“Any strong and lasting increase in pump prices will certainly dent demand, not only in the United States, but also across the globe.”
Despite OPEC’s concern in its monthly report about the prospects of demand destruction, as recently as April representatives of OPEC member states indicated that they wouldn’t take any action to halt rising oil prices until crude oil hit $100 per barrel.
OPEC’s forecast gave some support to oil prices on the NYMEX, and other reports by major oil forecasters could also move the markets this week. The Energy Information Administration (EIA) will release a report on Tuesday, and the International Energy Agency (IEA) will release its report on Wednesday. If these agencies follow OPEC’s lead and increase their 2010 oil demand forecast, it will bolster optimism among oil traders and could drive up the price of crude oil and refined products such as heating oil, gasoline, and diesel.
OPEC Willing to Let Oil Prices Climb
Oil prices have moved above OPEC's preferred range, but the cartel has no plans to raise output. (image: topnews.in)
Not long ago the oil minister of Saudi Arabia, Ali al-Naimi, proclaimed that the price of crude oil was “perfect” between $70 and $80 a barrel. But as prices have crept above $80 a barrel, hitting an 18-month high of $87.09 on April 6, OPEC has made no sign that it plans to increase output to combat rising prices. Now OPEC representatives have indicated they would be content with prices at $90, $95, or even $100 a barrel.
The price range of $70–$80 seemed perfect because it offered profit for producers without pushing the price for gasoline, heating oil, or diesel so high that it curbed consumer demand and stunted economic growth. Many authoritative analysts of the oil industry—most recently the International Energy Agency (IEA)—have warned that oil prices above $80 could start cutting into the consumer spending that’s expected to lift the global economy out of recession. “Ultimately, things might turn messy for producers if $80-$100 is merely seen as the new $60-$80,” said the IEA. If OPEC recognized that in December, why don’t they recognize it now?
According to the head of Libya’s National Oil Corporation, Shokri Ghanem, the push above $80 a barrel may only be a fluke, reported Reuters. When asked about the current oil price, Ghanem said, “What we are seeing in the market is a kind of fluctuation that we cannot build a policy on.” Reuters cited other unnamed OPEC representatives as saying that $90 or $95 per barrel might be the price trigger for OPEC to consider formally increasing oil production.
The oil minister of Kuwait, Sheikh Ahmed al-Abdullah al-Sabah, named a different price at which OPEC would take action: $100 a barrel. He added that current oil prices were not interfering with economy recovery, and that Kuwait was pleased with the current price level, Bloomberg reported.
In recent months OPEC has at times sounded like a consumer advocate, railing against speculation for artificially inflating oil prices and vowing to fight price volatility. The group has even looked the other way as members violate production quotas and add supply to an already oversupplied oil market. However, OPEC’s inaction as oil prices move further away from perfect seems to confirm suspicions that OPEC can’t resist the pull of higher profit margins, even if they run counter to the cartel’s long-term interests.
Reuters points out that OPEC has a history of naming price targets and then doing nothing as prices soar. In 2004, OPEC stated a target of $22 to $28 a barrel, but declined to raise output as prices moved higher. In 2009, crude oil at $50 per barrel satisfied OPEC, which didn’t want to stifle any economic recovery, but now OPEC members say oil may have to reach double that price before quotas are raised. And even if the price of crude oil does hit $100 per barrel, OPEC may decide that it’s comfortable with that price, too—or prices that climb even higher.
OPEC Study Will Predict Flat Oil Prices Until 2020
Steady oil prices for the next decade is what OPEC's newest study predicts. (image: travelblog.org)
A yet-to-be released study expects oil prices to remain in the $70-80 range for the next ten years, says CNBC.
Conducted by OPEC, the report and its fuller details will become public on Tuesday and Wednesday during a presentation at the 12th International Energy Forum (IEF) conference in Cancun, Mexico. United Arab Emirates 24/7 reports that excessive speculation and the global financial crisis are factors in the report’s result.
The IEF is the world’s largest assembly of energy ministers. It holds a unique position in the energy industry because it’s committed to informal dialogue, not policy recommendations or preparation, and because it invites nations that are often excluded from global assessments of energy due to their non-OECD status. Countries such as China, Brazil and India are of an equal or superior importance to the current global energy picture than the advanced western economies, as they are poised to consume the lion’s share of the world’s energy in coming decades. Because they are not OECD members (and therefore, not International Energy Agency members), they operate outside of the kind of monitoring and international data-collection upon which the rest of the world relies.
The meeting on March 30 and 31st will include an assessment of future global oil demand. Energy ministers from over 60 countries will be in attendance, including Brazil and Russia, as well as the CEOs of oil industry heavyweights Exxon Mobil, ConocoPhillips, Royal Dutch Shell, and Total.
OPEC Voices Support for Efforts to Curb Oil Speculation
Oil minister of OPEC member United Arab Emirates, Mohamed al-Hamli. (image: boston.com)
Speaking at a conference in Geneva, two ministers of OPEC member states expressed their organization’s strong support for regulations on oil speculation, which the ministers believe is driving current prices. The Boston Globe reported on Tuesday on the comments, given to press in Geneva on Monday.
“Prices are driven by something totally unrelated to supply and demand,” said Germanico Pinto, OPEC’s president and Ecuador’s oil minister. The minister made clear his belief that “acute and excessive price speculation” is that driving force.
Pinto’s comments come just a few days after OPEC’s latest meeting in Vienna, at which the cartel agreed to maintain current production levels, citing contentment with current prices.
The most telling comment at Monday’s conference in Geneva came from the United Arab Emirates’ oil minister Mohamed al-Hamli:
We always have problems with speculators, especially noncommercial speculators. We need some regulation, because we see prices very high and very low and sometimes they attribute this to OPEC.
OPEC is often demonized as a hugely powerful group of oil-producing nations whose greed is the main cause of unstable and/or high prices for consumer petroleum products like heating oil and gasoline. In recent years, OPEC has sought to deflect some of that blame onto oil market players who have no interest in purchasing physical oil, but buy and sell oil futures contracts to turn a profit, known as speculators.
Over the last few months, the prices of crude and other exchange-traded petroleum products, including heating oil, have been rising steadily, despite sluggish global demand and huge excess supplies of products around the world. With prices moving counter to basic macroeconomic forces, many observers inside and outside the oil industry have singled out unchecked speculation as the main cause.
The US Commodities Futures Trading Commission has proposed limits on how many oil contracts large speculators (like investment banks and hedge funds) can hold at once in an attempt to reduce those investors’ outsized influence on prices. Al-Hamli explicitly endorsed the CFTC proposal, which remains in a 90-day public comment period.
While OPEC’s support for action to limit speculators’ influence on oil prices will do little to speed up enactment of such regulations in the US or the UK, the cartel will no doubt continue to express its view, which will at the very least keep the issue in the spotlight.
OPEC’s Quota Cheaters Could Contribute to Lower Oil Prices This Year
A global oversupply of oil enabled by OPEC's quota violations could lead prices to fall. (image: tehrantimes.com, blog.redfin.com, and AP via cbsnews.com)
Monday, an article in the Financial Times questioned the strength of OPEC in light of its members’ extensive quota breaking, and stated some analysts believe that a current global oil glut could drag down prices by the end of the year.
OPEC quota compliance has become an especially important issue as quota “cheating” is happening with increasing frequency, and OPEC announced on Wednesday that it would maintain current quotas, despite some members exceeding them.
Back in December 2008, the cartel responsible for 1/3 of the world’s oil agreed to make the biggest production cut in its history; a slash in output of 2.2 million barrels per day. The cut was motivated by the financial crisis’ blow to global oil prices, which plummeted by nearly 70% in the months following July of that year. Since then, OPEC’s official quota has not budged, remaining at 24.845 million barrels a day despite the widely-recognized fact that the true output of its members has run hundreds of thousands of barrels per day above this level.
Oil Prices Rise Despite Oversupply, and OPEC Wins
Qatar is one OPEC member that produces more oil than its OPEC quota allows, but excess production has not brought down oil prices. (image: dubainews.biz)
Oil futures prices have rallied lately, which might lead some to think that the demand for oil must be greater than the supply of oil. On the contrary, oil producers like OPEC are trying to gauge whether there is too much oil on the market. If prices were determined by supply and demand, then the prospect of too much oil would bring prices down; however, as Reuters reported on Thursday, oil prices have risen despite plentiful supplies, demonstrating (again) that the fundamentals of supply and demand have a limited influence on the price of oil.
David Hufton, an oil trader with the firm PVM, puts it another way: “Anybody who still believes that oil futures prices are a reflection of the true state of the physical market is living in a time warp.”
Neither Hufton nor Reuters emphasized the point, but many careful observers of the oil market agree with Hufton that supply and demand do not determine oil prices, and place responsibility for higher prices on speculators who treat oil as a financial rather than a physical asset. Whether you believe speculators perform a useful function—by anticipating future changes in the supply of or demand for oil—or not, their influence in oil markets moves the emphasis away from the physical market.
OPEC President Vows to Fight Volatile Oil Prices
Germanico Pinto, Ecuador’s minister of natural non-renewable resources and current president of OPEC, has called for reduced oil speculation in pursuit of less volatile prices. (image: laht.com)
Bloomberg reported on Wednesday that another high-profile international figure has pledged to fight excessive oil speculation, which many believe contributes to volatile prices. OPEC President Germanico Pinto of Ecuador laid out what he sees as the negative impact of volatile prices on OPEC and the oil industry: “volatility produces difficulties in the markets and in defining a long-term strategy for public investment in the oil industry.”
When making long-term plans for oil exploration projects, oil companies rely on a projected crude price to predict future revenues and budget projects accordingly. Unpredictable prices can place such projects in a state of limbo, adding to uncertainty about future supply levels. Furthermore, as Pinto noted, the inability to predict the profitability of oil companies makes them less attractive to public investors.
Analysts: OPEC Will Leave Oil Production Quotas Unchanged
(image: livetradingnews.com)
OPEC members will meet in Vienna on March 17, and most observers believe that they will decide to hold oil production quotas at their current levels, Reuters reported on Monday. The news service surveyed 14 financial institutions and reported unanimous consent among them that OPEC will not raise quotas at the Vienna meeting. Eight of the 14 respondents, however, predicted that quota increases are likely at some point this year.
OPEC last adjusted its quotas in December of 2008, when it responded to plummeting oil prices with a sizable 4.2 million-barrel-per-day reduction. Apparently, the action worked. Crude oil prices have been rising steadily since then and have recently stayed in the range between $70 and $80 per barrel that the Saudi oil minister in December called “perfect.” OPEC’s contentment with current prices is no secret, and is the most important factor that will keep production targets steady after the March 17 meeting, as Mike Wittner of Societe Generale explained to Reuters: Read More »
OPEC Sees Slow Economic Recovery in US, Sluggish Oil Demand Recovery
Crude oil supplies from OPEC nations and elsewhere have been rising steadily for eight months, and weak demand from the US and China has helped keep more of those supplies on the market. (image: businessinsider.com)
Although OPEC’s expectation for a 0.8 million-barrel-per-day increase in global oil demand this year remains intact in its latest monthly report, the cartel has some serious concerns that the US’s slow climb out of recession will hinder demand growth. Uncertainty about monetary policy and future government efforts to breathe life into the US economy has caused hand-wringing within OPEC, the Houston Chronicle reported on Wednesday.
OPEC’s concern stems from the fact that the US remains the world’s largest consumer of crude oil, accounting for nearly a quarter of global demand. If the economy remains sluggish and manufacturing and other industrial activities do not pick up, US oil demand and, by extension, world oil demand will stay flat and not hit levels predicted and planned for by OPEC. In recent years, a humming Chinese economy picked up much of the oil demand slack from the US and other OECD nations, but OPEC also has fears about demand growth in China this year. As quoted by BusinessInsider.com, OPEC sees that
the [Chinese] government is keen to curb the nation [sic] energy use, an aim incorporated in its current five year plan. However, there is some uncertainty about oil demand growth. Slower-than-expected growth in the global economy could impact China’s exports and industrial production, dampening the need for oil.
With the world’s two biggest consumers showing signs of oil demand restraint, OPEC has reason to be concerned, especially since the economic factors that are the root of demand issues in the US and China are also putting a damper on oil demand in many other parts of the world. Furthermore, many OPEC members have recently exceeded production quotas in search of revenue, adding excess supply to the global market and putting downward pressure on oil prices.
So far, 2010 is shaping up to be a tough year for OPEC.
OPEC Members Ignore Oil Production Targets
El-Badri, speaking to the BBC, expressed concern over OPEC’s non-compliance with oil production targets. (image: news.bbc.co.uk)
In a move that the secretary general of OPEC, Abdalla Salem El-Badri, called “worrying,” OPEC members’ compliance with production quotas fell to only 55–56 percent in January. Last year the compliance rate in OPEC was 80 percent. When OPEC countries produce more oil than OPEC quotas allow, “the risk is you see a lot of oil in the market and no one is buying it,” El-Badri told the BBC program Daily Business. “Then the price will come down.”
For El-Badri, the real turning point would come if the price of crude oil fell below $70 a barrel. “Anything below $70 will not permit us to invest,” he said. Yet prices above $70 a barrel have eroded compliance, as member states such as Nigeria and Qatar have been unable to resist the temptation to pump more oil and reap more profits.
Saudi Arabia’s oil minister, Ali Al-Naimi, has previously referred to $75 a barrel as the “perfect” price, but sagging compliance and the reemergence of Iraq as a major oil producer threaten OPEC’s ability to control oil prices. Even if oil prices don’t fall, OPEC could still face competition from alternative energies, which begin to approach price-competitiveness—and could secure more stable investment—when crude oil costs $75 per barrel.
OPEC: Recent Rise In Crude Oil Prices Not Caused By Fundamentals
(image: opec.org)
Arguably, few institutions know more about oil pricing than OPEC—after all, scratch an OPEC member state and crude, not blood, wells out. And further, OPEC, or its membership, has a vested emotional interest in attributing any increases in price to sustainable fundamentals. When your economy depends on selling one and only one commodity, you want to believe that the market for it is robust.
Given that expertise, and also the natural inclination to interpret oil-related news in the most favorable light, it’s striking that OPEC does not believe that economic fundamentals are behind oil’s price increase. Instead, as reported by MarketNews.com Tuesday, OPEC’s Monthly Oil Market Report for January 2010 attributes oil price increases to speculation.
OPEC Hints at Crude Oil Price Climbing to $100 a Barrel
OPEC logos galore. (image: consolsoils.co.uk)
Even as the price of crude sank by a dollar a barrel on Tuesday, certain members of OPEC began to chatter cheerfully of higher oil prices in the future, inciting speculation that, given a push from some of the group’s biggest producers, crude might soon approach $100 a barrel.
Early on Tuesday, Kuwait’s Oil Minister Sheikh Ahmad Abdullah al-Sabah described $82 oil as “fantastic,” predicting that even if oil prices increase, OPEC will most likely not adjust its production levels in coming months. Meanwhile, an official in Kuwait’s Supreme Petroleum Council remarked that OPEC “will not consider it an alarming event even if oil hits $100…”, while Libya’s top oil official, Shokri Ghanem, said last week that, “As long as (oil prices) are under $100 there is no need for (OPEC) action.”
Saudi Arabia Invests in Future Oil Production and Refining
Saudi Finance Minister Ibrahim al-Assaf. (image: arabnews.com)
As reported Sunday by the Economic Times, Saudi Arabia will invest in oil production and refining to “achieve stability in the international oil markets.” According to the nation’s oil minister, Ibrahim al-Assaf, the goal is to “increase production and refining capacity to maintain balanced and acceptable prices by both producers and consumers.”
It’s a good story, but does it make sense? Saudi Arabia recently completed a huge expansion of its production capacity, bringing it to 12.5 million barrels per day. However, it doesn’t actually pump anything like that—it’s currently producing 8 million bpd, which means it already has more than 50 percent surplus capacity.
Second, Saudi Arabia has so much surplus because it, unlike such OPEC members as Nigeria and Qatar, honors the organization’s production quotas. If the kingdom is voluntarily pumping less than it could, why does it need yet more capacity that—by its past practices—it will not use?
Economist Rubin, Who Predicted 2008 Spike, Sees $100 Oil in 2010
Rubin predicted the last spike in oil prices—will he be right about the next one? (image: ipsnews.net)
According to BusinessWeek, Jeff Rubin, the economist who correctly predicted 2008’s massive crude oil price spike, believes that petroleum prices are steadily headed toward the $100 mark. Asserting that oil prices will hover around $90 by the end of March, the former CIBC World Markets Inc. chief economist believes that “it’s safe to say that we’ll see triple-digit oil prices by the fourth quarter of this year.”
Rubin attributes rising oil prices to increased consumption by countries with rapidly developing economies such as India and China. This occurrence will in turn force the United States to rely on more expensive non-conventional sources of oil. Increased consumption, Rubin believes, will outweigh other factors that could cause price spikes, such as political disturbances in oil producing nations and production limits set by OPEC. Rubin’s prediction challenges recent forecasts made by Peter Cooper, who believes that oil prices will drop in 2010 and that factors such as rising Chinese demand are not credible because the strength of emerging market economies is questionable.
Lamentably, if Rubin again proves correct, consumers should expect to pay more for heating oil as he predicts crude prices could reach up to $160 a barrel in 2012, a level at which he asserts “the global economy becomes very challenged.”
Iraq Threatens OPEC’s Power Over Oil Prices
Iraq’s production capacity is enough to create conflict within OPEC and even destabilize the Middle East. (image: z.about.com)
Iraq is threatening to throw a serious wrench into OPEC’s plans, reports Business Insider. OPEC members have said they are content with oil prices in the range of $70–80 per barrel and maintained their production targets at their recent annual meeting. But Iraq might not adhere to OPEC’s production quotas. The cash-poor country recently auctioned off some of its largest oil fields, with Russian and Chinese companies winning the most lucrative contracts. According to analysts, the auction could boost Iraqi oil production from 2.5 million barrels per day to as much as 12 million by 2016, which would quadruple its capacity and make it a rival to Saudi Arabia, the world’s biggest oil producer.
Such a drastic increase in oil production could threaten to undermine OPEC’s influence on oil prices, which currently stand at an amount that the Saudi Arabian oil minister, Ali al-Naimi, believes keep producers and consumers happy. If OPEC does not cut production to compensate for Iraq, the price of oil could drop significantly. OPEC will pressure Baghdad to adhere to their targets, but if Iraq flouts those targets there is little OPEC can do.
OPEC Maintains Production Targets
OPEC is keeping its production values unchanged for 2010. (image: reuters.com)
At a meeting on Tuesday, the Organization of Petroleum Exporting Countries (OPEC) decided to maintain its production targets for the coming year, a sign that prices are high enough to ensure revenue but not disrupt economic recovery, according to The New York Times. Most of the nations belonging to OPEC—chief among them Saudi Arabia—appeared happy with current oil prices; but other countries expressed concern over the fact that certain OPEC members (like Nigeria) have been exceeding production targets and thereby threatening to reduce prices.
Last year OPEC cut production by 4.2 million barrels a day in order to counteract slipping demand caused by the economic downturn. The maneuver worked; oil prices that had tumbled to as low as $33 a barrel a year ago recovered to $80 this fall. Since then, prices have slid back down to $70 a barrel, in large part because Nigeria and Qatar have ramped up production in recent months while American and European demand has remained weak.
Analysts Lay Out Two Scenarios for 2010 Crude Prices
Bloomberg asks 2009’s best oil forecasters what they see in their crystal ball for 2010. (image: telegraph.co.uk)
Bloomberg asked the oil analysts who had been most successful in predicting the price of crude oil in 2009 where oil prices would be headed next year, and two divergent scenarios come to the fore: the first sees crude staying high and looming in the $88-$92 range for the fourth quarter of 2010, while the second has it dropping much lower, to $59 a barrel by the end of 2010.
The first scenario, the Bloomberg post notes, is supported by the two analysts who were the most accurate forecasters of crude prices in 2009; their predictions were “within 9 percent of market levels.” Mike Wittner of Societe Generale SA and Hannes Loacker at Raiffeisen Zentralbank Oesterreich AG think that oil will stay up in 2010, buoyed by increased demand and stagnant production.
Why OPEC’s “Perfect” Oil Price Could Backfire
Saudi Arabia’s oil minister, Ali Al-Naimi, called oil prices “perfect” but they may breed competition. (image: nytimes.com)
In the world according to OPEC, $75 is the magic number for a barrel of oil. According to Amy Myers Jaffe at the Houston Chronicle, OPEC’s thinking goes like this: seventy-five dollars is enough to maintain investments in difficult-to-reach oil such as deep water and tar sands oil, assures that oil producers can fund national budgets, and allows investors to profit. And since the global economy is currently recovering, albeit slowly, with $75 oil, OPEC figures that $75 is not that damaging to the recovery. American drivers are still driving with $75 oil, and Chinese drivers are buying cars.
But, Myers Jaffe says, this is wishful thinking. She says there are two reasons why $75 is, in fact, too high.
