By Jason Simpkins
Crude oil prices settled $1.70 or 1.75% lower yesterday (Monday) after retreating more than $2.00 in early morning trading. The decline was driven, in part, by the Organization of Oil Producing Countries (OPEC), which gave several indications it would increase output to help combat soaring energy prices.
Analysts also believe that last week's assertion by the U.S. Federal Reserve that the nation's economy could slow in the first half of 2008 has some speculators worried that demand in the world's largest oil-consuming nation will be sharply curtailed.
Oil prices have been flirting with the psychologically important $100 a barrel level for the past month, reaching a record high $98.62 a barrel last Wednesday. However, crude prices pulled back at the end of last week, a move that carried over into yesterday's trading.
As he testified before the congressional Joint Economic Committee Thursday, Fed Chairman Ben S. Bernanke said the rate cuts in September and October "should" be enough to keep the economy from slipping into a recession – but also warned that the economy could stall.
"Our assessment is for slower growth, but positive," Bernanke said.
Still, the prospect of slower growth, if not a full-blown recession, has seemed to spur a drop in crude oil prices. That decline continued yesterday after OPEC signaled it might consider a production increase to deflate some of the speculative excesses that forced crude prices up by more than $30 a barrel since mid-August.
Saudi Oil Minister Ali al Nuaimi, OPEC's most influential voice, told reporters this weekend that talk of an output increase was premature, adding that OPEC will discuss oil prices at its next meeting. But don't think that translates into a production increase, Tobin Gorey, a commodity strategist at the Commonwealth Bank of Australia told the Associated Press.
"The comments by the Saudi oil minister on the weekend didn't necessarily say that they're going to increase production, it wasn't quite that extreme, but the mere fact that he's speaking aloud about it shows that the issue is there," Gorey said.
Meanwhile, Kuwait's acting oil minister, Mohammad al-Olaim, said that OPEC would "not hesitate to shoulder its responsibilities," AFP reported. He then said that the organization would be willing to increase output, "if there is a need to raise production in accordance with market parameters."
As oil prices spiraled higher in recent months, OPEC has been repeatedly urged by such consumer nations as the United States to raise output. So far, the cartel has resisted – but with one exception: Saudi Arabia will its output capacity by 500,000 barrels a day beginning next month as part of an $80 billion investment to reach a quota of 12.5 million barrels a day by 2010.
Whether or not Saudi Arabia will use its clout to encourage its cartel partners to do the same remains unclear, but some discussion on the issue is expected when member nations meet in Riyadh this weekend for the third summit in the group's 47-year history.
So far, high oil prices have been a boon for OPEC nations, which could see as much as $658 billion in revenue this year, according to the Energy Information Administration. That would represent a 9% increase from 2006. The EIA estimates that revenue will rise 16%, reaching a high of $762 billion in 2008.
The London-based Centre for Global Energy Studies estimates that OPEC will earn $90 billion – or 21% more than was estimated at the beginning of the year – because of the oil-price spike.
However, some analysts fear that at such a high level, prices could be unsustainable – or even worse, hindering hinder demand as they encourage investment into alternative sources of energy.
"No one wants oil prices to rise so much that they then collapse," Brad Bourland, head of research at Riyadh-based Jadwa Investment, told the Financial Times.
The Financial Times also reported that Saudi Arabia is very concerned about prices above the $80 a barrel level. Its net income is set to be 19% higher than forecast this year.
News and Related Story Links:
Analysts See Oil Breaking $100; Energy Watchdog Sees Costs Much Higher
GM Misses And Oil Hisses Toward $100
Oil Prices Hit New Record at $97 a Barrel as the Dollar Weakens and Commodities Continue to Soar
Three Ways to Profit From High Gasoline Prices
Crude Oil Bull Could Bring About a Global Bear
Soaring Oil Prices Spell Trouble For Emerging Markets
New York Times:
Fed Chairman Says Economy Likely to Slow
Opec to seek assurances on oil demand