What Next for the Price of Oil?
Summary
OPEC recently indicated that it would raise production at its Sep.
10 meeting in Vienna. To lower high oil prices, the production
increase must be substantial. And unless OPEC, or Saudi Arabia
alone, puts more than one million barrels of oil on the market,
prices will stay high well into the winter.
Analysis
Oil prices are holding strong at more than $30 per barrel in the
days leading up to the Organization of Petroleum Exporting
Countries meeting scheduled for Sept. 10 in Vienna.
Oil prices are staying high, despite indications that OPEC may
raise its production levels by 500,000 or 700,000 barrels per day.
But the cartel's 11 members are not in agreement over what is
causing such high prices, which will make an effective production
agreement harder to achieve. It is doubtful that OPEC will boost
production enough to bring significant relief from high prices.
Last week Al-Hayat, a Saudi-owned newspaper based in London,
reported that a production increase was likely and would be based
on the price band mechanism. The price band mechanism triggers a
500,000 bpd increase after oil prices remain above $28 for 20
consecutive days. More than 20 days will have passed when OPEC
ministers meet on Sept. 10. On Sept. 5, Al Hayat quoted an un-named
senior OPEC official as saying the cartel would announce an
increase of one million barrels daily at its upcoming meeting. But
the report added that the actual increase would only be 700,000
barrels per day since Saudi Arabia was already producing 300,000
barrels over its quota.
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Saudi Arabia, which has plenty of spare capacity and could use the
revenue, announced on Aug. 31 that it would work with fellow OPEC
members to seek a "suitable increase." United Arab Emirates Oil
Minister Obaid bin Saif Al-Nasseri also hinted at a production
increase when he said on Aug. 22 that $25 was a fair price for
consumers and producers.
Saudi Arabia's language indicates that it is planning to cooperate
with the cartel rather than increasing production unilaterally -
the one measure that may actually be able to bring down soaring
prices. Riyadh announced in early July that it would unilaterally
increase production by 500,000 barrels per day. However, according
to the U.S. Energy Information Administration, Saudi production has
only increased by 250,000 barrels. Political pressure from OPEC
nations may have dissuaded Riyadh from increasing production
unilaterally.
Venezuelan President Hugo Chavez changed his stance regarding a
production increase, saying on Aug. 31 that OPEC was ready to
increase production by 500,000 barrels per day if prices continue
above $28. Previously, Venezuela vehemently opposed production
increases, blaming the high oil prices on dwindling stocks, market
speculation, taxes and refinery bottlenecks in main consuming
countries. Iran and Mexico, a nonmember cooperating with OPEC, both
aligned their positions with Venezuela. But Iran is already
producing at close to full capacity and has nothing to gain from a
production increase; a decrease in price would only cut into Iran's
revenues.
Nigerian President Olusegun Obasanjo hinted at a production
increase during President Bill Clinton's recent visit. But his
statement was probably meant just to appease Clinton. Prior to
Clinton's visit on Aug. 23, OPEC Secretary-General Rilwanu Lukman,
a Nigerian, ruled out an immediate intervention by the cartel,
saying it would only intervene when it sees there is a common
interest among its members. Nigeria, like Iran, is producing at or
near full capacity.
Even if OPEC does decide to increase production at its upcoming
meeting, it is unlikely to significantly reduce soaring oil prices.
The numbers being discussed are practically moot. A half million
barrels per day, even 700,000, won't bring down prices
significantly.
Oil demand in Asia alone grew by nearly 600,000 barrels per day in
the first half of this year. And with the cartel in disagreement
over the cause of high prices, an actual production increase of
more than 700,000 barrels per day is unlikely. Speculation from
traders will bring down prices in the short term, but this will be
a very slight and temporary dip.
Not only are 500,000 or 700,000 barrels not enough oil, but the oil
won't reach the market until too late. If the cartel increases
production on Sept. 10, oil won't reach the market until mid- to
late November. By then, winter demand will spike.
Unless OPEC, or Saudi Arabia alone, puts more than one million
barrels of oil on the market, prices will stay high well into the
winter.
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