Oil price rise puts pressure on Opec

DAVID BLAIR | DECEMBER 2010 | SOURCE: Financial Times

Opec’s oil ministers will gather in Ecuador on Saturday as prices rise above the cartel’s informal ceiling of $90 per barrel.

A faster-than-expected recovery in global demand, aided by the cold winter in Europe and inflows of speculative capital, pushed the price of a barrel of Brent crude, the most important benchmark, to $90.92 on Thursday

Oil price rise puts pressure on Opec

At their last meeting, in Vienna in October, with prices hovering at about $80, Opec’s 12 members said they were happy with the state of the market and left their production quotas unchanged. Ali Naimi, the Saudi oil minister and de facto leader of the club, declared he was “comfortable” with prices in the $70-$80 range, a ceiling that he later raised to $90.

Although his latest upper limit has now been breached, analysts do not expect Saturday’s meeting in Ecuador’s capital, Quito, to decide any change in production quotas.

Opec will probably attribute the recent price rise to “temporary” factors, not the fundamental dynamics of demand and supply, said Caroline Bain, senior commodities editor at the Economist Intelligence Unit. “There probably won’t be a change in policy,” she added.

The interests of two of the most powerful countries in the oil market have now coalesced around maintaining a price level of about $75-$90, say other analysts.

This vital convergence has taken place between Saudi Arabia, the world’s biggest exporter of crude oil, and China, the second- largest importer.

The Saudi national budget for 2010 provides for total expenditure of $164.5bn. Assuming the kingdom produces 8.3m barrels a day, paying these bills and securing a surplus of $5bn for safety requires an oil price of $74.

Meanwhile, China introduced a new policy last year designed to achieve self-sufficiency in refined oil products. This guarantees profit margins for Chinese refineries of 5 per cent, assuming a crude oil price of $80. The margin falls to 3 per cent at an oil price of $90 – and to zero when a barrel costs $100.

Consequently, Saudi Arabia must preserve oil prices above $74, while China needs to keep them below about $90 in order to guarantee acceptable refining margins. In April, China chose to exert downward pressure on prices by reducing its crude imports for the month by 11 per cent below their six-month average.

Julian Lee, of the Centre for Global Energy Studies, said it was “serendipitous that we’ve seen Saudi Arabia and China protecting the two ends of the range that prices have been moving in”.

If prices stay above $90, China may again reduce its crude imports to cool the market; alternatively, Beijing could review its refining policy. “Which way China will jump is one of the uncertainties that the market is living with,” said Mr Lee.

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