OPEC Likely to Hold: Is $100 Oil Next?

Meeting in Vienna, the cartel isn't expected to cut production to combat oil's decline. Prices could settle in the $100-a-barrel range

by Stanley Reed

OPEC meetings are always somewhat surreal affairs, with oil officials conducting business in gilded hotel lobbies staked out by a crowd of reporters. But the meeting getting under way in Vienna on Sept. 9 is even more bizarre than usual—mainly because it is occurring in the month of Ramadan, when Muslims fast during daylight hours. To make things easier for the OPEC delegates, most of whom come from Islamic countries, OPEC is holding its meetings late at night. In fact, the final press conference, when the group unveils its decision on production, isn't expected until 3 a.m. on Sept. 10.

Although OPEC is known to pull surprises, it isn't expected to make any changes in its quotas this time, even though crude oil prices have fallen about 30% from their $147.27-a-barrel peak on July 11. With the world economy slowing and Saudi production at a robust 9.7 million barrels per day, perennial price hawks Venezuela and Iran are arguing for stricter adherence to OPEC quotas, which could trim around 800,000 barrels per day and nudge prices back up. But Saudi Oil Minister Ali Naimi appeared to scotch any threat of cuts on Sept. 9, when he arrived in Vienna at 6 a.m. and told sleepy reporters that the market was "well-balanced."

The way the Saudis see it, the market is in a healthy state, with inventories near the midrange of their five-year average. In addition, the fourth quarter, when consumption usually increases due to winter demand for heating oil, is just around the corner. It would be risky to cut production now with higher usage on the way, the Saudis argue.

Price Decline Satisfies Saudis

To be sure, the Saudis prefer to have the support of the rest of the OPEC members. But because they are by far the largest producers in OPEC, they usually get their way. Naimi, the key figure in lifting prices to their current levels during the past decade, has built up substantial credibility in the organization.

While Naimi doesn't want the recent price decline to turn into a rout, he is undoubtedly well-satisfied by recent events. The Saudis were worried by the surge of prices toward the $150-a-barrel mark earlier this year and have actively tried to cool off the market (BusinessWeek.com, 6/13/08). While they felt pressure from the Bush Administration, they were particularly alarmed by complaints from customers in emerging markets, especially Asia, which takes around 60% of their crude.

The emergency energy summit held in Jidda in June (BusinessWeek.com, 6/22/08) was greeted with skepticism at the time, but Saudi announcements this year of about half a million barrels per day of additional production have been an important factor in lowering prices.

Sustainable Target Price

The Saudi moves also have benefited from a turnaround in the dollar, which traders link closely to oil prices, and from an easing of fears that the world is about to run out of oil. Money that poured into commodity funds earlier this year has recently been pouring out. "The mood change between June and August has been very strong," says Lehman Brothers (LEH) economist Edward Morse, who was early in calling the oil price runup a bubble (BusinessWeek, 7/16/08).

One big question is what price the Saudis are aiming for. Saudi sources insist they don't have a target; they say that they are instead looking for a balanced market and will supply whatever oil their customers request. Indeed, the Saudis seem more to be seeking a price that is sustainable—meaning that it brings in enough revenues to fund the budgets of oil-producing countries without putting too much stress on the economies of customers. Around $100 per barrel, or perhaps somewhat lower, seems roughly to meet both criteria at the moment.

David Kirsch, an analyst at consultancy PFC Energy in Washington, says that of the major producers only Venezuela's free-spending President Hugo Chávez "needs $100 per barrel." With the cost of developing the world's most expensive oil, Canadian tar sands, now hovering in the range of $90-$95 per barrel, a market price for oil in the $100 range looks like a possible equilibrium point—at least until the next major change in sentiment.

Reed is London bureau chief for BusinessWeek.