Although crude prices this week hit a new record of more than $100, the oil ministers of the 13-nation Organisation of Petroleum Exporting Countries (Opec) are expected to be haunted by the US economic slowdown rather than the price surge when they meet on March 5.
“As in the past, Saudi Arabia will play a key role at the forthcoming Opec meeting. With production at nine million barrels per day, the Kingdom needs an absolute minimum Opec Basket price of $62/bbl on average in 2008, broadly similar to that required in both 2006 and 2007,” said the London-based Centre for Global Energy Studies (CGES), which is owned by former Saudi oil minister Sheikh Ahmed Zaki Al Yamani.
“This suggests the Kingdom will follow a similar policy to that adopted in recent years of adjusting the discounts against benchmark crudes for its export grades to choke off or stimulate demand as required,” the Centre said in its February report, sent to Emirates Business yesterday.
“In this way it has been able to vary production without requiring changes in official quotas. While the Kingdom may hesitate to support a cut in output quotas in March, it has already begun to tighten the discounts, suggesting it will continue to act quietly to restrict stock building and support oil prices, well above the minimum level it needs.”
Opec decided to keep output unchanged at its meeting early this month despite recurrent calls from the US and other major consumers to pump more crude to offset a sharp drop in stocks and ease boiling prices.
Ever since, its oil ministers issued conflicting statements about the forthcoming meeting, with Iran and Venezuela calling for cutting output and other members saying a decision depends on market conditions. But there was a general consensus that there should be no increase.
“The attitude of Iran and Venezuela is politically motivated given their rift with the US,” a Riyadh-based oil analyst said. “But I believe Saudi Arabia, supported by other Gulf Arab states, wants production to remain as it is.”
Saudi Arabia, which pumps almost a third of Opec supplies, has based its annual budget on a low price level of around $45 a barrel over the past three years and this has resulted in a massive surplus because of a sharp rise in actual prices.
Other Gulf states have followed such a fiscal policy, thus practically backing Riyadh’s position towards maintaining an Opec output level that will continue to ensure steady prices. In its 2008 budget, Saudi Arabia assumed a surplus of around $10.6 billion (Dh38bn) but economists expect the actual balance to surge above $40bn as oil prices are projected to average much higher than budget forecasts.
That was the case in the previous two years, when the budget recorded its highest ever surpluses of around $77bn in 2006 and $47.6bn in 2007. According to CGES, Opec’s decision next week will hinge on whether oil prices will remain at their current high levels.
“Although crude oil stock cover in the US has risen by three days since the beginning of the year, half of this has come from falling refinery throughput as plants enter turnaround. With the US economic outlook remaining weak, oil prices in excess of $100/bbl may not last long, but much will depend on how Opec views the situation when it meets on March 5,” it said.
“The Organisation’s president has implied that output could be cut, but Opec may hesitate to take such a step if oil prices remain close to $100.”
The report cited several factors for the latest surge in oil prices despite the bleak US economic outlook. They include a fire accident at another US refinery, the loss of around 200,000 bpd in Australia’s production because of tropical cyclone Nicholas, and increased shutdowns in Nigeria.
“These physical disruptions have been compounded by uncertainty over the future availability of oil as a result of the rising political tensions between Venezuela and the US, reports of the killing of Nigerian rebel leader Henry Okah while in detention, and a statement from Opec President Chekib Khelil that output will not increase when the Organisation meets in March.
“All of this has taken place in an environment in which global stock cover is as low as it has ever been and oil demand is still growing strongly in the subsidised markets of Asia and the Middle East, where final consumers have not felt the impact of rising oil prices, while Opec seems obsessed with the slowdown in the US and the rest of the industrialised world.”
$62bbl: With production at 9m bpd, Saudi Arabia needs to maintain this as a minimum Opec Basket price
$10.6bn: Billion was the budget surplus assumed by the Kingdom for 2008
$40bn: Economists predictions of the actual balance as oil prices are projected to average much higher than budget forecasts
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