November 30, 2008
The Organization of the Petroleum Exporting Countries yesterday delayed a decision on whether to cut the cartel's oil output, but demand that is falling in the United States and unexpectedly weak in China makes it likely that the group will lower production at its Dec. 17 meeting in Algeria, analysts and OPEC ministers said.
Saudi King Abdullah said in an interview published yesterday in a Kuwaiti newspaper that $75 a barrel would be a "fair price" for crude oil, well above Friday's closing price of $54.43 a barrel on the New York Mercantile Exchange but far below price levels OPEC was dealing in just four months ago.
Whether OPEC can arrest the slide in oil prices is a key question for everyone from U.S. motorists, now paying a nationwide average of less than $2 a gallon for regular gasoline for the first time since March 2005, to giant oil companies, many of which are shelving high-cost oil exploration and development projects.
In Canada, where oil tar sands projects would be worthwhile only if prices were higher than they are today, plans for expanded production have been postponed. Saudi Arabia has postponed plans to develop the Manifa oil field, which could produce 900,000 barrels a day of heavy crude oil.
The prospects for economic growth are highly uncertain and because of shipping time the effects of recent OPEC output cuts are still taking effect, making it difficult for the oil cartel to match production to demand and stabilize prices. Instead of fine-tuning prices, the group finds itself propelled by forces largely beyond its control.
Prices are just more than a third of the July peak of $147 a barrel. To boost prices back to $75 a barrel would require substantial output cuts by OPEC, which produces about 40 percent of the world's oil. Most would have to come from Saudi Arabia, which is the organization's swing producer. Asked at yesterday's meeting in Cairo about the prospects for a cut in December, Saudi oil minister Ali al-Naimi told reporters: "A cut is possible. We will have to see."
"Some countries are unable to sell their crude," OPEC President Chakib Khelil said to reporters. "Crude should be taken off the market. The market is oversupplied."
The swift decline in the price of crude oil has come despite earlier OPEC cutbacks as the world financial crisis and high oil prices of the summer continue to wash through the economic system.
U.S. oil demand in September fell 12.8 percent from the year before, according to a report by Barclays Capital Research. From July to October, Chinese oil demand dropped about 600,000 barrels a day when adjusted for inventory fluctuations, according to Paul Ting, an independent oil analyst.
"I wouldn't look to China to be a big bullish driver for oil prices in the near term," Ting said.
Whether new stimulus packages and infusions of government money around the world will revive demand remains uncertain. OPEC's Khelil said yesterday that oil demand is expected to be "much lower" than thought even a month ago, according to Bloomberg News.
Oil-exporting countries have a lot riding on the price of crude. An oil industry newsletter, Petroleum Argus, reported that Venezuela's state oil company plans a 30 percent cut in its capital spending budget for next year and that energy ministry officials there expect further drops in oil prices in the first quarter of next year. A former central bank official told the newsletter that Venezuela could face as much as a $35 billion revenue shortfall next year.
Demand has also fallen for west African oil exporters. Petroleum Argus reported that purchases of west African crude oil by Asia-Pacific oil refineries for the month of December have slipped to 16-month lows and that Chinese purchases had fallen to their lowest levels in more than two years.
Ting said Chinese consumption, long assumed to be a source of rapidly growing demand, had leveled off and declined because of the world economic slowdown and because higher domestic gasoline and diesel prices led to less fuel use. China's gasoline prices are about $3.50 a gallon.
With two rounds of production cuts, OPEC succeeded in halting a slide in oil prices in late 2006 and early 2007, when prices also sank to levels similar to today's. In late October, OPEC agreed to cut production by 1.5 million barrels a day. Analysts say that while OPEC members have exceeded their quotas, production in November dropped by about 1.25 million barrels a day from the month before.
"I didn't expect the OPEC meeting to have any real tangible results this time," Ting said. "The first cut is probably not fully felt, yet."