CAIRO: OPEC on Saturday faces its third test in as many months of its ability to engineer a rebound in prices hammered by plummeting crude demand amid a global economic meltdown.
But the outcome of the meeting, billed as a consultative gathering to assess the impact of earlier production cuts, likely hinges on a key issue with which the Organization of Petroleum Exporting Countries has had a checkered past: unity.
There is total confusion among OPEC s 13 members, said Fadel Gheit, managing director of oil and gas research at Oppenheimer & Co. in New York. These people … really have no business model. They basically thrive when oil prices go up, and now they are crying uncle when prices go down.
And, down they have gone, in a financial avalanche triggered by demand destruction, itself sped along by a world financial meltdown that also threatens to cut deeply into OPEC member states government budgets.
They (OPEC) simply don t react quick enough, and prices keep going down, said Vincent Lauerman, OPEC expert and president of Calgary, Canada-based consultancy Geopolitics Central.
This meeting will come down to what Saudi Arabia, the kingpin and traditional price dove in a group that supplies 40 percent of the world s crude oil, wants, he said.
Whereas crude stood at about $147 a barrel in mid-July, it now hovers about $90 lower. On Friday, the US benchmark West Texas Intermediate crude for January delivery was trading at about $54 per barrel.
The cartel, whose next scheduled meeting is on Dec. 17 in Algeria, has already held one emergency meeting – on Oct. 24 in Vienna – to try to halt the slide in prices with an announcement of a 1.5 million barrel per day drop.
It failed to support prices, and the cartel hastily convened the Cairo gathering on the sidelines of the Organization of Arab Petroleum Exporting Countries meeting.
But they have been circumspect about expectations, leading some to speculate OPEC is staying quiet to maintain the element of surprise.
As long as they do a substantive cut, they may be getting ahead of the curve, and should be cutting enough to get ahead of demand destruction, said Lauerman, citing about 1 to 1.2 million as the magic number.
The recent price drop has left price hawks Venezuela and Iran clamoring for further reductions of at least 1 million barrels a day. Both countries need crude of about $90 per barrel to meet current spending needs aimed in part at propping up domestically unpopular regimes.
They have found support from non-OPEC oil giant, Russia. Its president, Dmitry Medvedev, said Thursday his country would cooperate with the group to support prices.
Other OPEC members, such as Nigeria and Ecuador, face budget problems too, making them reluctant to implement more cuts that might shrink revenues further.
Unlike many of their fellow members, the Saudis are better positioned to cope with the drop in prices. The International Monetary Fund estimates Riyadh needs crude in the range of about $50 per barrel for 2008 fiscal accounts to break even.
Saudi Arabia has not projected its intentions ahead of the meeting.
But earlier this month, during the Group of 20 meeting in Washington, King Abdullah pledged the kingdom would do everything in its power to help the global economy recover.
Higher oil prices would undermine that promise.
Also unclear, after two earlier cuts failed to push prices higher, is what the group can do without prolonging the global economic downturn.
I would play good cop and not do anything, said Oppenheimer s Gheit. If they are patient, they will be rewarded because you will see a precipitous drop in capital spending, and that will tighten the market, in itself.
And, if demand goes up, they will look like the good guys, he said.
But demand has shown little indication of rebounding soon.
OPEC itself, along with the International Energy Agency, has significantly revised down its projections for demand growth in 2009.
Meanwhile, global crude inventories are growing, as evidenced by a US government report showing a surprisingly large 7 million barrel build in stocks last week in the world s largest energy consumer.
OPEC s last round of cuts would put its total production at about 30.5 million barrels per day, according to the IEA. That is about 500,000 barrels per day higher than the forecast call on OPEC crude in much of 2009.
Those factors argue against restraint if some in OPEC want crude back up to at least $70.
A Nov. 24 Oppenheimer research report says that for oil to rebound to $65 a barrel, OPEC would need to cut crude production by more than 3 million barrels per day from its September levels – a move it called highly unlikely.
The Algerian oil minister and OPEC president, Chakib Khelil, has urged a wait-and-see approach.
Khelil argued earlier this month that the group risks losing credibility if it enacts new cuts before the Algeria meeting only to find members were not complying with the Vienna cuts.
Political considerations are also likely to factor prominently.
Saudi Arabia is a close US ally in the Middle East, and is eager to see concerted Washington backing for peace efforts in the region.
One way of winning new support from the incoming administration of US President-elect Barack Obama would be by tacitly working to undercut two of Washington s most strident foes, Venezuela and Iran. It would not be an onerous job for the Sunni Muslim Saudis, who have no great affection for Shia Iran.
Saudi Arabia is playing ball with the US, said Gheit. It is going to punish Venezuela. It is going to punish Russia. It is also going to curtail Iran.
Geopolitics Central s Lauerman agrees that major slumps in prices could, at least, be fueled by intra-cartel rivalries that undercut group unity.
Where I really question where they ve lost control is the downside, said Lauerman. When prices go through the floor, it could be that Saudi is punishing non-OPEC producers and OPEC members who aren t playing along.
