OPEC stands by oil price and output policy
Weak fundamental outlook gives cause for concern.
October 12, 2010 2:48 by Reuters
OPEC stands by its $70-$80 oil price target and is almost certain to maintain an output policy already held for nearly two years, but will monitor bloated inventories as the world creeps out of recession.
The resilience of the market, still around $80 a barrel in defiance of ample supply and weak demand, has lifted the pressure for now from the Organization of the Petroleum Exporting Countries. Oil Minister Ali al-Naimi of top OPEC exporter Saudi Arabia offered support for the status quo, reinforcing the widely-held view Thursday’s meeting would maintain a production policy intact since December 2008.
“The market is very well balanced. Everyone is happy with the market,” he told reporters on arrival in Vienna late on Monday.
He also reiterated his belief, stated earlier this year, that $70-$80 a barrel was the ideal price — high enough for producers to invest in new supply and not too high for a vulnerable world economy or to dent consumer demand.
OPEC’s monthly report lent weight to the argument.
“There is now a broad consensus in the market that crude oil prices around the current range have been accommodative in promoting adequate investment while at the same time supporting the economic recovery,” the report issued on Tuesday said.
Naimi did not specifically say what Thursday’s meeting would decide, but other ministers and delegates suggested the most likely outcome was no change.
“It is very unlikely that there will be a change,” one OPEC delegate told Reuters on Tuesday. “Gulf countries are comfortable with the current price levels.”
For much of this year, oil has inhabited Naimi’s perfect range, although this month U.S. benchmark crude has climbed above it, largely in response to a weakening dollar.
Saudi Arabia, keen to preserve long-term demand for its extensive reserves, is a traditional price moderate, but some in the group, including Venezuela, Iran, Libya and Algeria, have nurtured ambitions for higher prices.
They have often argued dollar weakness, which erodes the value of their petrodollars, justifies most costly oil.
A robust market, however, is a disincentive to abide by output targets even when inventories are close to record highs.
“If the dollar weakens further, prices will go up and will likely lead to further over-production, increasing supplies further,” said Carsten Fritsch, analyst at Commerzbank.
“They (OPEC) can only hope this mis-match between the oil market and fundamentals does not get out of control, but there is not much they can do at the moment.”
HOW MUCH FURTHER WILL DOLLAR FALL?
Against a basket of major currencies , the dollar in October has hit its lowest in nine months, in anticipation of further U.S. economic stimulus.
Dollar-denominated commodities, including oil, can draw support from weakness in the U.S. currency as they become cheaper for buyers holding other currencies.
It has recovered slightly from its lows and is waiting for fresh direction from the latest set of minutes from the U.S. Federal Reserve, expected to be released at 1800 GMT on Tuesday.
“The effectiveness of further quantitative easing is uncertain,” OPEC said in its monthly report.
“With respect to the $U.S./euro exchange rate, continued increases in U.S. money supply could further weaken the dollar, although revived concerns about Euro-zone sovereign debt would likely have a similar affect on the euro.”
If the dollar effect melts away and the oil market switches its focus to weak fundamentals, OPEC says it stands ready to act should the price fall too far.
Its report saw continued economic recovery, albeit at a slow pace, and pegged global oil demand growth for next year at 1 million barrels per day, steady from its previous forecast.
It trimmed slightly its assessment of the demand for OPEC crude for the rest of this year, but held its forecast for 2011 at 28.8 million barrels per day (bpd), marking a 200,000 bpd increase from this year.
The 12 members of OPEC in September pumped just over 29 million bpd, while the 11 with output curbs produced 26.63 million bpd above an agreed ceiling of 24.84 million bpd, according to the latest Reuters survey.
Although OPEC has kept its official supply policy unchanged since the record cut of 4.2 million bpd agreed in December 2008, discipline with agreed targets has dropped to some 57 percent as the oil market has stabilised.
(Additional reporting by Amena Bakr and Alex Lawler; Writing by Barbara Lewis; editing by William Hardy)