Divisions within Opec are being aired ahead of an emergency meeting the organisation has called for next month, signalling tense discussions to come as oil exporting nations struggle to balance their individual revenue needs with the world economy's need for more stable oil prices.
The divisions could "tear the organisation apart," a London oil analyst said. "Saudi Arabia has not joined the Opec hawks, led by Venezuela and Iran, in calling for another supply cut, and we think we could be witnessing the beginning of the end for the organisation," Neil McMahon at Sanford C Bernstein wrote in a report on Friday. "As the only country likely to have any real influence on supply within Opec in the near and longer term, the Saudis are the key to the future existence of Opec."
Despite his reputation as a price hawk, the Iranian oil minister Gholamhossein Nozari declined yesterday to spell out whether he believed Opec should cut production quotas at its Nov 18 extraordinary meeting in Vienna, which was called on Friday to discuss the impact of the global financial crisis on oil markets. "The aim Opec pursues is establishing stability in the market," he told reporters. Nonetheless, Mr Nozari said consumers would ultimately suffer if crude prices did not return to a "logical level" that would support investment in energy supply.
That strongly suggests Iran continues to favour defending an oil price of at least US$90 a barrel, which economists say it needs in order to pay for expensive domestic infrastructure and military programmes. Crude dropped by more than 10 per cent on Friday on fears of a worldwide recession and amid further signs of weakening energy demand, dipping to a 13-month low of $77.09 a barrel on the New York Mercantile Exchange before rebounding slightly to close at $79.87.
Oil prices are currently at almost exactly the same level as a year ago, when the commodity was undergoing an unprecedented rally that ultimately carried crude to its all-time peak of $147.21 on July 11. The Qatari oil minister Abdullah al Attiyah said on Friday that a "huge decline" in crude prices could occur if Opec failed to agree quickly on a plan to counter the impact of the global financial crisis.
But a consensus may not be easy to achieve. On the one hand, the Opec president and Algerian oil minister Chakib Khelil said the organisation of 30 oil producing nations was "very likely" to cut production quotas next month. Libya also came out in favour of production cuts. "We're very worried. Opec should protect its interest," Shokri Ghanem, the chairman of Libya's National Oil Corporation, said in remarks published by the state-run Jana news agency. "We're suffering from the decline in oil prices and from the decline in the value of the assets in which we invested, because of the global financial crisis."
On the other hand, the Opec kingpin Saudi Arabia, which holds the organisation's only substantial spare production capacity, failed to voice support for such views. Instead, its Opec governor, Majid al Moneef, on Friday told an energy conference in Washington DC that planned global investments in oil and gas processing and refining projects were vulnerable to the world financial crisis because they depended heavily on debt financing, while oil exploration and production ventures would be little affected. Previous statements by Saudi oil officials have indicated the kingdom's primary concern is oil-demand destruction and its long-term effect on oil markets, rather than short-term price volatility.
Economists have estimated the Saudi economy could withstand a drop in crude prices to below $60 a barrel, the floor price that some analysts have pegged for crude if Opec fails to make a concerted effort to reduce supplies. The UAE, which also holds a small amount of spare production capacity, is believed to side with Saudi oil officials. Its recently announced oil and gas projects - including plans to develop two small oilfields near Abu Dhabi and a large sour-gas field, and to increase production from established offshore gas fields - are geared towards addressing the country's domestic energy needs rather than developing more crude export potential.
The Saudi concerns about demand destruction received support on Friday from the International Energy Agency's (IEA) latest forecast. The Paris-based energy adviser to 28 industrialised countries cut its oil demand projections for this year and the next by 240,000 barrels per day (bpd) and 440,000 bpd respectively, based on weakening deliveries to developed countries and downwards revisions to International Monetary Fund assumptions about global gross domestic product for next year.
The IEA expects global oil demand to average 86.5 million bpd this year, less than half a percentage point higher than last year, and 87.2 million bpd next year. It said global oil supply declined by 1.1 million bpd last month to 85.6 million bpd due to hurricanes in the Gulf of Mexico and stoppages in Azerbaijan and some Opec producers, such as Nigeria. Despite the tighter supply, crude prices fell nearly 18 per cent in September. Among the IEA's major clients, the UK has been outspoken about its hope that Opec will avoid a further production cut on the heels of the 520,000 bpd cut it decided to implement at its last regular meeting in September.
The British prime minister Gordon Brown said on Friday that Opec would be wrong to encourage higher oil prices while the global economy is in a fragile state. "It would be wrong for the world economy, wrong for British people who are paying high petrol prices and high fuel prices at the moment, for Opec to cut production," he said. The Opec emergency meeting precedes by about a month the organisation's next regularly scheduled meeting in Oran, Algeria.
@Email:tcarlisle@thenational.ae
