By William Patalon III
Money Morning/The Money Map Report
The Organization for the Petroleum Exporting Countries (OPEC) is looking to stabilize global crude oil prices at $70 to $90 a barrel, which is why the cartel has called an emergency meeting in Vienna on Friday.
The cartel had been scheduled to meet Nov. 18.
OPEC rarely makes such price projections. But in the last few weeks, the cartel has become more vocal about the price range for crude its members consider acceptable – especially after oil prices skidded below the $70-a-barrel level last week. Analysts don’t expect to see a return of the informal price band OPEC traditionally tries to promote, because they believe the cartel is more preoccupied with the steep price drop.
“The producers are worried at how fast prices have come off,” Giyas Gokkent, head of research at the , told Reuters. “I don't think OPEC is too concerned about the upside of oil prices as most of them were producing at their limit when prices were high. This time around they are more concerned about setting a floor.”
U.S. oil prices, which hit a record of $147.27 a barrel in July, have since plunged by more than 50%, actually hitting a 16-month low of $68.57 last week. Crude oil prices rebounded a bit on Friday, closing above $70 a barrel.
Gas prices have followed suit, dropping 25% since breaching $4 a gallon in July. A gallon of regular gas set a new national average of $3.125 last Wednesday, auto club AAA reported.
OPEC first established the price-band strategy in March 2000. Under that “mechanism” for managing prices, OPEC established a price target of about $22 to $28 a barrel for a reference basket of its crude. The central target was set at $25 a barrel.
With this price-management strategy in place, the cartel was to raise or reduce oil production if the target price slipped outside the set range for a specific number of trading days.
OPEC quietly discarded this management practice in 2005.
On Saturday, Hugo Chavez – the president of the typically hawkish OPEC member Venezuela – said his country would be satisfied if crude prices remained in a range of $80 to $90 a barrel. The reason: Venezuela has foreign loans and a large amount of savings, making the current price of oil less than critical for that country.
“Should the oil price stabilize between $80 and $90 [a barrel], that’s more than enough,” Chavez said.
This time around, the price hawks have been joined by Qatar's oil minister, Abdullah al-Attiyah, and OPEC President Chakib Khelil, who both called for production cuts to stabilize prices.
Khelil, who is Algeria's energy-and-mining minister as well as OPEC’s president, on Saturday said that OPEC members see oil prices bottoming out in range of $70 to $90 a barrel. That same day, Qatar’s Attiyah said oil prices at between $80 and $90 barrel would “be acceptable to consumers and producers at this time.”
Both cartel officials called for a production cut of at least 1 million barrels per day from current output levels.
Interestingly, Saudi Arabia, the world's top crude oil exporter, also was not part of the price/production target discussions this weekend.
Analysts said that while the kingdom is acutely aware of the vulnerability of the global economy to any cut in production, it would also be more comfortable with prices at around $80 a barrel.
Gokkent, the Abu Dhabi analyst, said that Saudi Arabia “will probably want to maintain where things are at the moment … like the other producers, [the Saudis] will be looking at $80 a barrel as the comfortable range.”
Other analysts believe that OPEC will have cut production by a substantial amount for prices to rebound to the $80-a-barrel level.
“In the real world, we'll need Asian consumption to also slow down for the world to slow,” said Serene Gardiner of Standard Chartered Bank PLC. “OPEC will have to cut more than 1.5 million barrels per day for the market to react further.”
The global financial crisis has clearly affected the crude oil market.
On Oct. 10, the International Energy Agency (IEA) lowered its forecast for 2008 global demand growth by 250,000 barrels per day (bpd) to 440,000. The agency cut its 2009 growth forecast by 190,000 bpd to 690,000, Money Morning reported.
A week ago, in its monthly report, OPEC reduced its forecast for 2009 demand by 190,000 barrels a day, as well. It was the cartel’s seventh-consecutive forecast reduction. OPEC said that total oil consumption in developed countries fell by more than 1 million barrels per day in the 12 months through to the end of September.
Developed nations in 2009 will need only 400,000 barrels a day more oil than this year, the cartel said, whereas demand from emerging markets will increase by an estimated 1.1 million barrels.
News and Related Story Links:
Reuters South Africa:
OPEC seen keeping oil prices around $70-$90 a Barrel.
Money Morning News Analysis:
Oil Slides to New 13-Month Low Increasing Chances of an OPEC Cut.
Saudi Arabia Hesitant to Join OPEC in Production Cut
Emirates Business 24/7:
Opec likely to agree on small output cut
October 2008 Oil Report.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.