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December 3, 2010 9:12 am
For the first time in two years, Brent crude, the global oil benchmark, is back above $90 a barrel. The surge, amid freezing temperatures in Europe and rebounding economic growth after the summer lull, puts Opec in a dilemma just a week ahead of its meeting.
The oil cartel, which controls more than 40 per cent of the world’s crude oil output, will gather on December 11 in Quito, Ecuador, to decide its output policy for the northern hemisphere winter period, when oil demand usually peaks.
Until recently, most Opec officials had suggested the group leave its official output levels, known as quotas, unchanged for the time being. But the rise in prices might force Opec to act or, at the very least, acknowledge rising price expectations.
Oil demand is growing faster than even the most bullish traders and analysts had expected only a couple of months ago. The International Energy Agency, the western countries’ oil watchdog, forecasts a rise this year of 2.3m barrels a day, the second-biggest annual increase in more than 30 years. The IEA is likely to revise higher its forecast when it releases its final update of the year on December 10.
One-off factors, such as the cold weather in Europe and the reliance of Chinese companies on diesel-fired power generators to bridge a gap in electricity supply, could boost oil consumption even further, drawing inventories down and tightening the market.
The market is full of chatter about $100 a barrel. Even senior oil traders in the physical market, who until recently had been telling me prices would remain between $70 and $80 a barrel next year, concede now that prices could surge higher.
The latest jump means that prices are breaking above the range of $70-$90 a barrel that Saudi Arabia, Opec’s leader, has favoured in public. Brent ended on Thursday at $90.69 a barrel. Meanwhile, Brent spot prices are higher than forward contracts for the first time since April 2008. The swing, known in market jargon as backwardation, suggests the oil market is rapidly tightening.
Will Saudi Arabia work to protect the de facto $70-$90 a barrel price band?
The range is much more important than some observers believe. For Riyadh, it represents the first tacit agreement in years between consumers and producers on prices. In discrete meetings recently in London, Adeeb Al-Aama, a Saudi oil policy adviser, explained this view to market participants, saying that although there had not been a formal agreement on an oil “price band” between consumers and producers, “opinions [on the price were] more convergent than at any past time”.
Riyadh, after having fought for years to achieve this tacit agreement, will fight hard to preserve it.
So what will Opec do in Quito? Officially, maybe, little. But unofficially, expect Saudi Arabia and its allies in the Gulf, including Kuwait and United Arab Emirates, to open the spigot quietly this winter if demand keeps rising. Probably as important, Ali Naimi, Saudi oil minister, will try to manage price expectations as soon as he lands in Ecuador. He only needs to reiterate the obvious: his preferred price band is $70-$90 a barrel. And where are oil prices right now? Well, above the band. That says it all.
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