OPEC faces tough test as oil price tumbles

“Daily Updated Mining & Exploration News on Crude Oil Price”—At the beginning of the year, OPEC producers felt confident that strong economic growth and tight supplies would keep oil prices high. When oil crossed the $100-a-barrel threshold in February, the cartel’s president blamed speculators and said there was not much OPEC could do.

But now, panic is gripping producers as prices drop. Oil is down by half since July, and the speed of the decline has stunned oil-rich governments that have become dependent on high prices.

As the global economy continues to weaken, the Organization of the Petroleum Exporting Countries faces its toughest test in years.

The problem for the oil exporters, who meet for an emergency session in Vienna on Friday, is to find a way to stop the price drop at a time when oil consumption is falling markedly in industrialized countries. Even the Chinese economy, long the biggest engine of growth for oil demand, seems to be cooling.

Most analysts expect the group to announce a production cut of at least a million barrels a day, which would be more than 1 percent of the world oil supply. Chakib Khelil, OPEC’s president, said last week that an output cut was “obvious” and suggested the group might meet often in coming months for further adjustments.History suggests that OPEC will face a tough time propping up prices as oil consumption slows and the world teeters on the edge of a global recession, analysts said. Some experts warn that if the cartel took too much oil off the market, it could push prices up so much as to worsen the global economic crisis.

“OPEC’s problem is they don’t know how much demand is falling,” said Jan Stuart, an energy economist at UBS. “So the risk they run is either they don’t do enough, or they do too much. That’s a tough choice.”

Nobuo Tanaka, the executive director of the International Energy Agency, said a cut in production could harm consumers and delay an economic recovery. “The slowdown may be prolonged,” Tanaka told reporters on Monday in Paris, where the energy agency, which advises industrialized countries, is based.

Oil prices settled at $70.89 a barrel on Tuesday, down $3.36 and near the 14-month low they reached last week.

The biggest question is what price the cartel is prepared to defend. In 2000, producers adopted a price band of $22 to $28 a barrel, and adjusted production levels accordingly. The mechanism was imperfect, and many producers felt it constrained them, but it basically worked to ensure stability in oil markets.

But defending a price requires spare capacity, so that production can be raised if prices get too high, as well as discipline on the part of OPEC members, so that production can be lowered when prices fall. OPEC abandoned its price band when its spare capacity virtually disappeared in 2005 amid rapidly rising global oil demand.

Now, with consumption growth slowing sharply and new oil projects coming online, some spare capacity has become available.

Lawrence Eagles, an oil analyst at JPMorgan, said in a research note that he believes the “price-band mechanism offers the best way for OPEC to manage the market under current conditions.” Eagles said OPEC did not want prices to slip below $70 a barrel, and would be more comfortable with prices around $80.

The cartel, which controls 40 percent of the world’s oil exports, has found it difficult in the past to get all its members to abide by production cuts. When prices fall, producers have an incentive to increase their output to maximize revenue, not stick with OPEC quotas.

Producers are aware that high prices pose a risk to the global economy. Oil consumption is already falling sharply in developed countries, and there is a rising risk that oil demand could slow even in fast-growing developing nations.

OPEC’s researchers recently downgraded their forecasts for global oil demand because of the financial crisis. OPEC expects global demand to rise 550,000 barrels a day this year, to 86.5 million barrels a day.

For many analysts, these expectations are still too optimistic. A growing number of independent experts now say they believe that global oil consumption may fall this year, for the first time since 1993.

“OPEC will have to decide how far it can ignore the global economic crisis and pressure from consuming countries,” wrote researchers at the Center for Global Energy Studies, a London consulting group founded by Sheik Ahmed Zaki Yamani, a former Saudi oil minister. “The real danger is that a big cut will send prices soaring again, putting the global economy at even greater risk.”

OPEC Studying Measures to Balance the World Oil Market

The next OPEC meeting will study measures to balance the world oil market over the next six months in case it becomes oversupplied amid a deteriorating world financial situation, OPEC President Chakib Khelil was quoted as saying by Algeria’s official news agency.

The agency APS also on Sunday quoted Khelil, the country’s own energy minister, as saying the future of oil demand in China and the Middle East was a “great unknown”, and it was essential for OPEC to balance supply and demand if a surplus of supply developed.

“During its next meeting in Vienna on November 18 OPEC will study the measures to take to cope above all with the oil market over the next six months in light of the worsening of the world financial situation,” the agency quoted him as saying.

“If winter is harsh, there will be fewer problems, but in the second quarter we are going to record a fall in demand and that is what the organisation is going to study in Vienna.”

He added: “The essential thing for OPEC is to find a balance between supply and demand.”

Khelil said the current oil price reflected the true balance of supply and demand following the departure from the market of speculators,

OPEC Statement on The Bearish Sentiment in the Oil Market

SAN FRANCISCO — Without a quick end to the financial market crises and improvement in the global economic outlook, the bearish sentiment in the oil market is likely to continue, OPEC said Saturday in a statement to the International Monetary Fund at its annual meeting in Washington, D.C.

SAN FRANCISCO — Without a quick end to the financial market crises and improvement in the global economic outlook, the bearish sentiment in the oil market is likely to continue, OPEC said Saturday in a statement to the International Monetary Fund at its annual meeting in Washington, D.C.
Media reports cited Mohammad Alipour-Jeddi, head of the Petroleum Studies Department of the Organization of Petroleum Exporting Countries, as saying that the U.S. financial crisis and continued deterioration in the world economy is likely to sustain a bearish oil market and pose a risk of oversupply in the first half of 2009.
“The shift to bearish market sentiment has been precipitated by a growing awareness of weakening oil market fundamentals, due to deteriorating economic prospects, an associated decline in oil demand growth and the healthy supply situation primarily from increased OPEC production,” he said in the statement.
Agence-France Presse reported Sunday that Iran predicted that OPEC would cut its oil output at its November meeting.
It cited an Iranian state-media report quoting Mohammad Ali Khatibi, Iran’s OPEC representative, as saying the OPEC would likely seek the cut “in order to balance supply and demand.”
OPEC’s Alipour-Jeddi said in the Saturday statement that existing regulations have proved “insufficient to properly contain the negative impact of speculative activity in the market, which highlights the need to consider further measures.”
He called for the extension of U.S. Commodity Futures Trading Commission monitoring procedures to the other regulated exchanges and the unregulated over-the-counter market and suggested ending regulatory loopholes that allow speculative positions to exceed existing limits

The increase of Crude Oil Price until $113.63/Barrel - OPEC News

Rising $3.86 on Thursday, the price for crude oil produced by OPEC jumped back above the $110-mark, data issued by OPEC showed on Friday.

One barrel (159 liters) of OPEC-produced crude stood at $113.63 Thursday, compared with $109.77 on the previous day.

Oil prices were pushed by concerns about rising tensions between the United States and oil producer Russia, Vienna-based energy consultants JBC said.
OPEC calculates an average basket price based on 13 important brands produced by cartel members.

The increase of Oil Price news : "Rises to near $117 as Investors Eye Falling US Gasoline Inventories, OPEC Meeting

Oil prices rose Thursday above $116 a barrel as investors considered a fall in U.S. gasoline inventories and a possible output tightening by OPEC at its next meeting in September.

By midday in Europe, light, sweet crude for October delivery was up $1.37 at $116.93 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose $1.01 overnight to settle at $115.56 a barrel.

The September contract expired Wednesday after rising 45 cents to $114.98 a barrel.

In London, October Brent crude rose $1.47 to $115.83 a barrel on the ICE Futures exchange.

The price gains came despite a huge rise in U.S. crude inventories. But not all U.S. fuel supplies were abundant.

Gasoline inventories shrank by a larger-than-expected 6.2 million barrels to below-average levels in the week ended Aug. 15, the U.S. Energy Department’s Energy Information Administration said Wednesday. Meanwhile, distillate inventories — which include heating oil and diesel fuel — rose by less than expected, the EIA said.

That was enough to offset a hefty 9.4 million barrel rise in U.S. crude stocks last week when the average analyst forecast had been for a 1.7 million barrel increase, according to energy information provider Platts.

“That report had something for everyone,” said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney. “On the one hand, the crude inventory buildup was quite strong, but the gasoline draw was also very prominent.”

Investors are also trying to anticipate the outcome of the next Organization of Petroleum Exporting Countries meeting in early September, as supply concerns could rise further if members of the cartel decide to lower their output in response to slower demand. Venezuelan Oil Minister Rafael Ramirez said he might propose an output cut at the next OPEC meeting.