The fall in the oil price amid growing economic fears has laid bare divisions
within the world’s energy producers.
At its quarterly meeting on Thursday in Vienna OPEC, the cartel of
oil-exporting countries, held its oil-production cap at 30m barrels a day.
However, this decision to maintain the status quo came amid strong
disagreements among the members.
The core dispute is between Saudi Arabia, reluctant to cut its production, and
Iran, which is pushing for a pull-back in OPEC’s output.
The fundamental worry is that the oil price could collapse if the global
economy takes a turn for the worse.
The price of Brent crude, the London’s benchmark, has already dropped by
roughly a quarter since March, to trade at below $100 a barrel. But Credit
Suisse is now warning it could fall to half that level if another severe
credit crunch were to occur.
“Most frequently, we are asked, ‘How bad can things get?’ The short answer for
oil prices would be, ‘very bad’,” said the bank’s analysts.
The team modelled what would happen if this summer sees a repeat of the
collapse in trading that accompanied the global recession of 2008.
“Brent oil prices would again hit $50 a barrel and the case would be
unsurprisingly simple. Oil demand would deflate sharply following acute
crises of confidence (all involving Europe (Chicago Options: ^REURUSD – news) to some degree). Activity falls
away.
“There would be oil supply aplenty for a stretch. Costs would deflate. The US
dollar, in this narrative, would strengthen and oil prices would fail to
recover much beyond $80 a barrel in the next few years.”
It is a worse-case scenario that not surprisingly the oil producers are
keen to avoid but they differ on the right course of action now.
Iran would like to see output lowered to raise prices, while the Saudis argue
the case for increasing production to make crude more affordable.
At the moment, as oil prices slide, it seems opinion among OPEC is swinging
towards the Iranian position. Iran is under particular pressure at the
moment as its oil exports are dropping because of Western sanctions imposed
over its nuclear programme. But even the UAE and Kuwait, key Saudi allies,
appear inclined to cut production in the face of concerns about the eurozone
crisis. Reduce supply as global demand weakens and so support prices is the
logic.
“There is at the moment an unjustified rise in the organisation’s
production,” warned Youcef Yousfi, the oil minister of OPEC member
Algeria at Thursday’s meeting.
“There is a risk that prices will fall, uncontrolled, to levels from which it
will be very difficult subsequently to bring them back.” As analysts at
Barclays Capital note, these hawks “have expressed doubts on how much the
recent fall in oil prices will actually help boost the global economy, given
the levels of taxation in the consuming nations”.
There are also “fears that the sovereign debt issue may worsen oil demand
significantly and the surplus OPEC is creating at the margin may worsen
unless acted upon now”.
Saudi Arabia, however, takes the “dovish” position that the world should avoid a
rise in prices that would dampen global growth. Help Europe through its
crisis with the crutch of cheaper oil is the view. That is rather handy,
given it is extra Saudi oil that is largely responsible for lifting OPEC’s
true output to 31.6m barrels a day, well over the formal 30m barrel target.
Saudi output in April set a 30-year high.
The subsequent dampening of the oil price offers a “kind of stimulus” for the
world economy, Saudi’s oil minister has argued, as it brings down costs for
businesses and consumers.
“Under this view, the aim should be to keep oil as far away from the headlines
as is possible, and stabilise it at around $100 a barrel,” say the team at
Barclays (LSE: BARC.L – news) .
Not that anyone involved in these negotiations is coming from a place of pure
altruism, of course. As Malcolm Graham-Wood, a veteran oil-watcher at VSA
Capital, puts it: “The hawks who can’t produce any more will demand the
price rises and the doves will express tolerance and respect for Western
economies”.
In the end, OPEC’s decision was a classic compromise: wait and see.
