A Dangerous Time for OPEC, Good for Consumers

Posted by: Stanley Reed on December 01

OPEC’s ad hoc meeting over the weekend in Cairo broke up without agreement on production cuts, sending crude prices down sharply on Dec. 1. The Saudis apparently think that Iran and Venezuela, the most prominent advocates of output reductions, aren’t pulling their weight. “Behind the scenes, the GCC [Gulf Cooperation Council] States, led by Saudi Arabia, are worried about rising stock levels and falling prices, but they are also adamant that they will not be forced into action as swing producers to compensate for the failure of other major producers to trim their own output,” reported Washington-based consultants PFC Energy from the meeting.

With demand turning negative this year for the first time in more than two decades, OPEC is heading into an impasse that could be dangerous for the organization’s cohesion. Meetings are becoming increasingly acrimonious with accusations of bad faith marring the atmosphere. Indicating spotty compliance with earlier cuts, OPEC has only taken 850,000-1.2 million barrels per day off the market of the 1.5 million agreed to at October’s meeting, according to the organization’s Secretary General Abdullah al Badri. Roughly 60% compliance is the usual rule of thumb on OPEC cuts.

The Saudis are saying in effect “why should we make all the cuts while you guys benefit?” At the same time, the Saudis don’t mind giving their customers in the West and Asia a bit of a respite when their economies are fast slowing. The Saudis have also built up something like $500 billion in liquid assets for rainy days like these. Unlike the small gulf states such as Qatar and Abu Dhabi, they view their cash piles primarily as buffers for the inevitable periods when prices and revenues slump not vehicles for employing the world’s investment management industry. Even with prices in the mid-$40s per barrel, they could balance their current account, according to a recent UBS study.

Now its on to Oran, Algeria, for, believe it or not, the fourth OPEC meeting this fall. This one will take place on Dec. 17. This was supposed to be mainly a ceremonial occasion to finish off the one year term of OPEC’s Conference President Chekib Khelil, who is Algeria’s Energy Minister. But it is taking on more importance. The OPEC powers will ponder what it is they need to do to draw a firm line under the more than 60% fall in prices since mid-July. The most often quoted crude West Texas Intermediate now goes for about $50 per barrel. But the OPEC basket, which more accurately reflects what OPEC members receive for their oil is pegged at $47.29 today.

The talk before the Algeria confab will be of the need for more cuts. But the markets are likely to focus more on how real the trims are and the credibility of OPEC’s pronouncements. Times like these are the most testing for the producers’ club, whose members have been spoiled. For years they didn’t need to do anything while prices kept on a rising curve. “Prices may have to drop further to focus the minds of some within the organization,” writes PFC Energy.