It's that time of year again, and members of the
Organization of the Petroleum Exporting Countries might already be getting just
what they want--an ideal oil price for producers and consumers alike.
That's a good place for the oil market to be in ahead of Tuesday's meeting of
key oil producers in
Luanda
,
Angola
,
who will discuss OPEC's production policy--but don't expect it to last long.
Right now, OPEC members have a "reasonably good price" at around $70
a barrel, said Charles Perry, president of energy-consulting firm Perry
Management. They can "still make a lot of money at this price and it is
not having much direct effect on the economy."
"It can't get much better than that," he said.
Of course, many would disagree that prices of about $70 a barrel aren't
perfect, but after all the wrangling over the past couple of years that lifted
prices to a record high of nearly $150 in July 2008, the shifts in production
and supplies, changing news and high volatility, it would be fair to argue that
oil is finally in a more stable state.
"I do not think OPEC will want to do much at this meeting -- they will
want to leave well enough alone," said Perry.
Besides, Saudi Arabia's Oil Minister Ali al-Naimi said it himself earlier this
month, telling the world that OPEC ministers saw no need for any change to the
cartel's output targets during the Dec. 22 meeting.
Al-Naimi was widely quoted as saying that the current oil price was stable and
"perfect" for consumers and producers.
"Instead of living through a prolonged price crash, OPEC has managed to
keep oil prices in the $70 to $80 range during the worst Western [U.S., Europe,
Japan] recession in 75 years," said Byron King, editor of Energy &
Scarcity Investor, published by Agora Financial LLC.
And at these prices, "the Saudis are bringing in enough oil revenue to fund
their budget--not too much, not too little," he said.
In fact, prices have been trading between $80 and $70 for the past seven weeks.
That's probably about as stable as oil can get.
"Economic data remains tepid, inventories are high, OPEC production
compliance is still relatively solid, and large spare capacity is in
place," said Jason Schenker, president of Prestige Economics LLC.
"We seem to be close to a relative near-term equilibrium," he said.
Rocking The Boat
On the other hand, when something's too good to be
true, it usually is. It hasn't been an uneventful journey to get to this point,
and there are a lot of factors in the market that can still shake things up.
"OPEC believes that the price level is justified by improving demand but
in reality, the price is what it is because of the effects of economic stimulus
and the weak dollar," said Phil Flynn, senior market analyst at PFGBest.
Now, the "biggest challenge for OPEC is not to produce oil faster than the
recovery warrants or they could add to ... a global oil glut," he said.
The environment for the current so-called perfect price is also far from ideal,
with OPEC's member production on the rise and ongoing uncertainty over the
strength of the global economic recovery and its impact on oil demand.
Earlier this week, OPEC revised higher its forecast for world oil demand next
year to 85.13 million barrels a day, citing demand from developing countries
such as
China
and
India
. But it also said the pace of recovery in developed countries remained
at risk and could dampen demand.
"We're still at historically elevated [price] levels and seeing prices
settle in at the $70 level while there is so much uncertainty about a full
demand rebound is a harbinger of things to come," said Neal Ryan, managing
partner at Ryan Oil & Gas Partners LLC.
Meanwhile, a survey conducted by Platts, a division of McGraw-Hill Cos. (MHP),
released last week showed that OPEC production excluding Iraq, which is not
bound by an output quota, averaged 26.49 million barrels per day in November.
That figure exceeds the current quota target of 24.845 million barrels a day.
It is arguable that OPEC will decide to make the higher actual output
"official" in the form of an increase in the quota, said Sam
Subramanian, editor of AlphaProfit Sector Investors' Newsletter. "Compliance
of member nations in restricting output to OPEC targets has fallen in
2009--from about 80% in April to 60% currently."
Even so, the quotas may be a good thing. "You might argue that
non-compliance with the quotas is harming credibility, but I think that having
the quotas in place already gives more flexibility for individual and immediate
adjustments to supply if the physical demand signals are dubious early next
year," said Catherine Hunter, research manager at IHS Global Insight.
And that flexibility is key. "The world can count on OPEC to raise output
as demand rises, either by increasing quotas or by cheating, or by a
combination," said Perry, pointing out that there is around 5 million
barrels per day of surplus production available worldwide, most of it in OPEC.
Still, Patrick Kerr, a managing director at Amerifutures Commodities &
Options, isn't so sure it'll be enough. "As the global recovery gains traction
coupled with emerging
Asia
's phenomenal growth, look for ... prices to surpass previous highs --
and this time stay higher," he said.
Background Talk
So as
OPEC members gather in
Angola
, oil
market experts don't expect them to make any surprising decisions on
production, but there certainly won't be any shortage of things to discuss.
"Statements made at the upcoming OPEC meeting will highlight some
conservative optimism about the nascent economic recovery, while stressing a
need for near-term compliance with agreed-upon production levels," said
Schenker.
"Spare capacity and the ability for OPEC to respond to potential increases
in demand are likely to be mentioned as well," he said.
Then there's one emerging issue that's likely to come up during discussions at
the meeting: Iraqi production.
Iraq
currently produces around 2.5 million barrels a day and, according to a report
from AFP, plans to boost output to 12 million barrels per day within seven
years.
"OPEC has to deal with
Iraq
's new
ambitious crude oil production plans," said Chris Mayer, editor of Agora
Financial's Capital and Crisis.
True,
Iraq
is
years away from hitting its big targets, "but as the oil market looks
fairly well-supplied at the moment," any abnormal increase in output will
"likely be viewed negatively by the market and could hurt the oil price
short term," he said.
All the while, "
Iraq
's
efforts to ramp up production will lower the percentage of the pie for other
OPEC members" said James Williams, an economist at WTRG Economics.
"An [output] increase to 6 million barrels per day would increase total
OPEC output by 15% from its current level if all other members stayed the
same," he said. That would mean "either the world uses that extra oil
or other OPEC members will need to cut."
Sooner still, a big problem for OPEC could come in the second half of 2010 --
that is "if oil stockpiles are still relatively high, the stimulus
packages in the U.S. and China begin to wane and worldwide manufacturing
inventories are back to more normal levels," said Adam Sieminski, chief
energy economist at Deutsche Bank. "
Nigeria
and
Iraq
could
be producing more oil by then too."
But those issues likely won't be on OPEC's agenda until the next meeting, set
for March, he said.