How will Opec respond if crude oil prices remain above $80 a barrel?
There are increasing concerns that sustained high prices will damage economic recovery, and Opec itself knows that prices rising too high could damage its own prospects, by leading to a fall in consumption. Opec has made clear it thinks $70 – $80 is a suitable price range, but is hardly providing reassurances it will take action. A Reuters report claims that two of the cartel’s delegates on Tuesday said that $90 – $95 would now be required to trigger a change in quotas, and also quotes Libyan oil minister Shokri Ghanem saying recent price rises do not appear sustained enough to warrant a reaction.
And the cartel’s latest monthly report, out on Wednesday, is tight-lipped on the prospect of sustained $80+ prices.It does however reiterate its belief in the $70 – $80 range:
In the meantime, the recent IEF meeting in Cancun, Mexico, underlined the consensus among consumers and producers that prices around $70-80/b are essential to promote adequate investment without hindering the economic recovery. Current conditions in the world economy and the very comfortable outlook for oil market fundamentals are likely to remain supportive for prices to continue to move within this range over the coming months.
Of course Opec is not exactly known for speaking with one voice. Several member nations – such as Venezuela, Nigeria, Iran and Angola – are thought to be virtually ignoring existing quotas and pumping as much as they can. The next Opec meeting is not scheduled until October, meaning in the interim it will mostly up to ‘central banker’ Saudi Arabia to adjust its own supply to maintain some level of control. Saudi Arabia’s output rose almost 100,000 barrels per day in March, according to the IEA report out on Tuesday, and its compliance with quotas fell from 98 per cent to 91 per cent.
Meanwhile, what Opec has done is point to the role of investor sentiment and speculators for rising prices:
“On the Nymex, speculators, as reflected by money manager activity, have extended net long positions in the crude oil futures markets to a record high. Additionally, positive economic news in the US has also encouraged speculative activity in product markets as open interest for Nymex gasoline and heating oil futures and options have reached all-time highs.”
Opec are far from the only ones to point out speculation has been an issue of late in energy markets, and there are questions over its ability to affect the price levels anyway, if the price is being caused by, say, an imbalance in the grades of crude available and the refining capacity to turn it into products that are most in demand. Even so, it will be interesting to see where Saudi Arabia falls in the next round of Opec compliance estimates, if prices remain above $80.