Saudi Arabia in a tough spot as Opec meets

The world's swing crude supplier is torn between price hawks and customers who want $100 oil.

VIENNA // Saudi Arabia, the world's oil superpower, faces a choice this week between indulging Opec price hawks with a cut in production and listening to its customers, who would prefer to see the current slide in prices extend below US$100 a barrel. The pressure on Opec from consuming nations has eased now that prices have fallen by 30 per cent from their record above $147 in July, but the US, Europe and Japan are still teetering on the brink of recession due in part to this year's oil shock.
Opec's price hawks - Venezuela and Iran - have pointed to forecasts of an excess of oil supply next year as a reason for Opec, and particularly Saudi Arabia, to reverse recent increases in exports. But Ali al Naimi, the Saudi Arabian oil minister who holds the key to Opec policy as the world's biggest producer, has kept a guarded silence in the run-up to Tuesday's ministerial meeting in Vienna. For Saudi Arabia and other low cost producers such as the UAE, reducing oil prices is not just about pleasing consumers. With decades of reserves left in the ground and modest budgetary needs, their principal concern is to sustain demand for oil in the long term.
Analysts were divided over which argument would win the day. Dalton Garis, an associate professor of economics and market behaviour at the Petroleum Institute in Abu Dhabi, said Saudi Arabia would enter Tuesday's meeting concerned about the effect that high oil prices were having on the world economy. "They have been on the phone with people around the world who have been giving them an earful," he said.
Oil prices will likely hover between $90 and $110 a barrel without a change in Opec supply, a range reflecting the fact that a "risk premium" had been taken out of the price. With falling demand in the US and increased production capacity, mostly in Saudi Arabia, there is a larger cushion to protect against any disruption. "I think the lightning rods like Iran will say they can cut," he said. "For the larger producers in the southern Gulf, my guess is they won't go for a cut."
But Raad Alkadiri, an analyst at PFC Energy in Washington, said Mr Naimi might favour trimming exports, now that the shock of $150 oil was easing. "There will be a supply overhang in 2009, which they want to avoid," he said. "Opec as an organisation and Mr Naimi in particular have put market fundamentals at the forefront of the decision making process, and they will not want to stray very far from that path."
According to Opec's latest oil market report, demand for its exports next year will be approximately 1.3 million barrels per day below its current production rates. Preliminary inventory data are already indicating a surplus of crude on the market, with commercial oil stocks in the industrialised world increasing by 30 million barrels in July, versus a reduction of 15 million barrels a month before.
The last time Opec ministers met was at the peak of the oil price crisis in June, when King Abdullah of Saudi Arabia personally intervened. He invited the prominent players of the global industry to the Red Sea port of Jeddah and took the lead in answering the pleas of the industrialised world with a big, unilateral increase in exports outside the ambit of Opec. Mr Alkadiri said it might still be too soon for Mr Naimi to publicly reverse that gesture, with oil prices still hovering above $100 a barrel.
New York crude oil futures closed on Friday at $106.23. Most Gulf oil producers can easily balance their budgets at $60 a barrel or below, but there is no consensus within Opec about what the price floor should be. Iran and Venezuela, for example, would begin to feel the pinch below $100, Mr Alkadiri said. In a report last week, Barclays Capital said prices would continue to fall without a strong indication from Opec that it would defend a certain price level with production cuts.
The 13-member group is currently pumping 800,000 barrels per day (bpd) above its formal target of 29.7 million bpd for the 12 members bound by quotas, so any quotas or increased market discipline would be interpreted by traders as an output cut.
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