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By Robert Rapier on Mar 15, 2007 with no responses

OPEC Holds Steady

I have been trying to get inside the mind of OPEC lately and predict what they would do at this week’s meeting. Worldwide crude inventories have been falling, so the market appears to be undersupplied heading into high-demand season. So, if I was in charge of my country’s oil, do I open the taps a bit and risk bringing the price down, or do I hold steady and hope that I can react fast enough if prices start to spiral out of control? Or, do I make additional cuts in an attempt to stabilize prices at a higher price band?

After mulling this over, I think I would take the middle-ground. The current prices have not stemmed demand. The money continues to roll in. The world has come to accept that oil at this price is the new reality. So, I would let things coast along with assurances that OPEC will react as needed. And that is what they did. Here are some excerpts on the meeting from various AP sources.

The representative from the UAE spelled out the strategy:

“We seek prices that are stable, sustainable and acceptable to producers and consumers alike,” Mohammed al-Hamli, the United Arab Emirates’ oil minister and OPEC president told the meeting in his opening address.

I am sure that acceptable in this context means “as high as possible”, but you wouldn’t just come right out and say it. He also expressed concerns over what they seek to avoid:

But despite apparent general OPEC satisfaction with present price levels, al-Hamli expressed concern about the weak U.S. dollar, nothing that was “having a significant effect on the purchasing power of oil-producing developing countries in many parts of the world.”

Any prolonged economic downturn would curb the world’s appetite for oil, and drive down prices.

Of course they want to make as much money as they can without killing the goose laying the golden eggs.

It sounds like the members are quite satisfied with current price levels:

“I will strongly argue against this,” said Nigerian Oil Minister Edmund Daukoru, when asked if the 12-nation organization would contemplate raising output.

Kuwait’s oil minister, Sheik Ali Al Jarrah Al Sabah, also said his country supported keeping output levels where they are, and Shokri M. Ghanem, head of the National Oil Corp. of Libya, also suggested OPEC would opt for the status quo.

But there are indications that supply and demand are on a collision course:

The 10 OPEC members bound by quotas agreed to total cuts of 1.7 million barrels a day in October and February. And while analysts say that the reductions have not been fully implemented, they have kept prices at levels OPEC feels comfortable with.

But with the traditionally high-demand North American summer driving season approaching, there is little likelihood of a near-term prolonged slide in prices – and of resulting production cutbacks any time soon. Instead, OPEC might be looking at pressure to increase production at its next meeting, possibly in June.

Total OPEC output last month averaged 30.2 million barrels – 400,000 barrels less than OPEC should produce to meet world demand, said the IEA, the energy watchdog of the world’s major industrialized countries. And – barring the unexpected – consumption is set to increase with the approach of the high-demand North American summer driving season.

Personally, I think they will need to open the taps a bit before June. If they don’t, or if they can’t (referring to recent reports of declines in Saudi Arabia), then barring recession prices will be headed back into record territory.