The evidence mounts that $30/bbl for its benchmark crude basket is the preferred price this year for the Organization of Petroleum Exporting Countries—more particularly for the Saudis.
Cuts unwarranted?
The surprise decision by OPEC at its Feb. 10 ministerial meeting in Algiers to both reduce the group's current production over quota and to trim quotas by a further 1 million b/d left many analysts contending that such a combined 10% cut in the group's output was unwarranted, given surging demand and oil prices already comfortably above the OPEC $28/bbl price band ceiling.
Maybe that was the point. Could the Saudis be jawboning up the price to take advantage of surging demand?
OPEC ostensibly has embraced the International Energy Agency's view that oil supply exceeded demand by 800,000 b/d in 2003. Since IEA's upward revisions of its demand projections and downward revisions of supply have become routine of late, it's not surprising that the agency cautions that this estimated excess necessarily represented stockbuilding. But OPEC has shrugged off the caution and accepted the notion of a large stockbuild last year as fact, claiming the likelihood of oversupply in the seasonally slack second quarter.
The Centre for Global Energy Studies, in its latest monthly oil market report, contends that OPEC remains terrified of a repeat of the 1998 oil price crash and is misreading the market.
The London-based think tank notes that the market situation is very different from what it was in 1998.
"When the crash came in 1998, global oil inventories had been rising for 7 out of the previous 10 quarters, and oil demand had stagnated in the wake of the Asian financial crisis and its aftermath," CGES said. "By the middle of 1998, global oil stocks were estimated at 5.8 billion bbl, enough to meet nearly 90 days' worth of future demand. At the beginning of 2004, global oil inventories stood at 4.9 billion bbl, representing just 70 days' worth of forward demand. A price crash of the magnitude envisaged by OPEC is almost inconceivable with stocks at such low levels."
So is OPEC instead convinced that IEA got it right this time? Or could there be another agenda?
Budget concerns
In a separate report, CGES wonders if Saudi budget needs aren't the driver for a $30/bbl price floor this year.
Until the 1998-99 oil price collapse, Saudi Arabia had seen its perennial budget deficit shrinking in recent years. But the oil price collapse added $23 billion to its deficit, accumulated since 1982, of $134 billion. It's no coincidence the Saudis have taken the lead on price defense since then. And a sagging petrodollar only adds to that impetus.
CGES calculated that the Saudis would need a price of at least $27.80/bbl at its likely projected output of 7.9 million b/d in order to balance its budget for the year.
"Should Saudi Arabia wish to retire $2.5 billion of debt as well—which happens to be half the amount of debt actually retired in 2003—then it would require a minimum price of $30.30/bbl, with output at 7.9 million b/d," it said.
Yet that volume would be above the kingdom's Apr. 1 quota of 7.638 million b/d. Wouldn't such cheating on quota risk OPEC cohesion or contribute to global oversupply? Note that IEA has ratcheted down its forecast of non-OPEC supply growth this year; note also that Saudi Arabia is the only OPEC country with significant current surplus productive capacity. And given the supply risks in today's market, an overheated market probably would welcome a little cheating.
And demand growth could surprise even the Saudis.
Energy Security Analysis Inc., Wakefield, Mass., contends that the extremely low level of US oil stocks may negate the effect of a seasonal drop in global oil demand and thus prevent the severe downward pressure on prices that OPEC foresees.
ESAI notes that while US imports of Russian and West African crudes fell in November, Chinese imports of these crudes soared. At the same time, US refineries are emerging from winter turnarounds with low gasoline stocks—due in part to tougher new fuel specifications that are shutting out some gasoline imports. As throughput rises ahead of the summer driving season, don't expect a strong US stockbuild. And the market may need every bit of that OPEC overproduction just to keep prices from exceeding $30/bbl for the year.
(Online Feb. 23; author's e-mail: [email protected])