Opec does not change the price of oil

Oil prices are down on Monday as the market responds to Opec’s decision to maintain its production’s official level unchanged. But the downward move is just a blip within the roughly $40-$50 a barrel band in which oil has traded since the beginning of the year. It appears that Opec has not changed a lot in the oil market with its Sunday decision, at least in the short-term.

Oil prices have stabilized at a $40-$50 band

In early trading in London, Nymex April West Texas Intermediate was $2.14 down, to $44.11 a barrel while ICE April Brent was $2.01 lower to $42.92 a barrel.

The drop in prices of about $2 does not change the broad trading range of the year. Since December 31, Brent oil intraday low stands at $39.55 a barrel, while the intraday high was set at $50.53 a barrel. The average price for Brent oil so far this year is $44.62 a barrel. 

Ed Meir, an oil analyst at MF Global in New York, said that the price downward move will linger for most of the week.

“The markets will surely conclude that there is now less insurance in the system should demand take a turn for the worst, or alternatively, if cartel members step up their cheating, which thus far, has been kept to a respectable minimum.”

The decision not to cut further could signal that Opec believes that current output will be enough to dent inventories. So far, the release of floating storage inventories is preventing prices from rising by  maintaining supply above demand, but as soon as the flow from super-tankers ends, the balance could move into a deficit of output relative to consumption, argue some bullish oil analysts.

It also signals that Opec could wait to achieve its target of $75 a barrel – likely until the end of the year. The market is trading the Nymex December 2009 WTI contract at just above $51 a barrel.

What about the geoplitics of the meeting? The market here agrees that Saudi Arabia, who is a member of the G-20 group, wants to work with other leading nations to restore economic growth.

On Friday, US president Barack Obama spoke with Saudi Arabia’s King Abdullah.

Lawrence Eagles, head of commodities research at JP Morgan in New York and a former senior official at the International Energy Agency, the western countries’ oil watchdog, said that the outcome of the meeting “pretty much fulfills the Saudi Arabian agenda” about “the need to help reflate the world economy, and pressure on the OPEC free-loaders to pull their weight under the agreed cuts.

“At the moment getting the world economy back on its feet is more important than lifting the oil price by a further $10 a barrel.”

Others in the market agree with this view. JBC Energy, the Vienna-based consultants, described the market sentiment as:

“The organisation’s decision to leave output unchanged has led prices to decline further in early trading today. Opec’s decision is widely interpreted as a measure to provide support to the global economy.”