Nerves show as OPEC’s emergency session is brought forward in a bid to halt freefall.
In a clear sign of its growing fears of a further fall in oil prices, OPEC has brought forward its Extraordinary Meeting for a second time, to now be held in Vienna, October 24th, stating “the Organisation is concerned about the deteriorating economic conditions with contagion risks”.
Such urgency has set alarm bells ringing, with the expectation that the cartel of 13 will slash oil production in a bid to bolster plummeting crude prices and protect its budget, having got used to a US$100 comfort zone.
OPEC’s concerns are based on growing global recession fears and figures quoted in its October 2008 Oil Market Report, which sees the organisation revising down world oil demand growth for 2009 by 0.1 million bpd, to 0.8 million bpd and 2008 demand by 0.33 million bpd, to show growth of 0.55 million bpd. With demand growth dropping, OPEC is anxious to place limits on production and avoid a return to a sub $50 barrel scenario.
Albeit briefly, October saw WTI futures prices drop below US$66 per barrel, a huge tumble from the record $147 price witnessed in July of this year.
An International Monetary Fund (IMF) report released in October, suggests that Iran and Iraq would be hardest hit by a fall in prices. Iran is said to require a price average of $90 per barrel this year if it is to avoid budget deficit spending. Iraq too needs a $111 barrel average to balance its books.
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Quite whether a cut in production would be sufficient to bolster prices remains to be seen. Encouragement for OPEC may perhaps be found in the market’s reaction to the emergency meeting, with WTI up by $2.09 Monday 20th, at $73.94 a barrel. With world GDP growth having been revised down to 3.8% for 2008 and 3.3% for 2009, according to OPEC figures, achieving the all-time highs hit in July, seems doubtful.
The extent of production cuts needed to bolster prices is unclear. At its meeting September, OPEC agreed to curb production by observing output quotas set in 2007, which would lower supplies by 500,000 bpd.
Only a matter of weeks later, such quotas seemed destined to drop again, indicating the rapidly deteriorating condition of the world economy – at least in the eyes of OPEC members.
Total OPEC crude production did decrease from August to September, averaging 32.16 million bpd, a drop of 308 600 bpd compared to August. With global financial markets rallying, further cuts may not need to be as extensive as previously thought.
Any decision to slow production also raises the question of exactly who is to do the cutting. Given the growing fiscal pressures that the Iranian government faces, according to the IMF report, it will loath to cut-back its output, and much needed receipts. Instead, it is likely that the world’s largest net oil exporter, Saudi Arabia, will be tasked with the job.
OPEC members are clearly nervous at the prospect of a revenue reduction – after all why else would its emergency meeting be brought forward?
With world oil demand growth decreasing by all accounts, both this year and next, the cartel will be eager to prevent prices dropping any further. Indeed, the world’s largest consumers did seem capable and willing to pay $100 earlier this year. A cut in production looks likely to be OPEC’s hoped remedy to rev-up prices once again.
