Opec’s oil ministers will gather in Ecuador on Saturday as prices rise above the cartel’s informal ceiling of $90 per barrel.
A faster-than-expected recovery in global demand, aided by the cold winter in Europe and inflows of speculative capital, pushed the price of a barrel of Brent crude, the most important benchmark, to $90.92 on Thursday.
At their last meeting, in Vienna in October, with prices hovering at about $80, Opec’s 12 members said they were happy with the state of the market and left their production quotas unchanged. Ali Naimi, the Saudi oil minister and de facto leader of the club, declared he was “comfortable” with prices in the $70-$80 range, a ceiling that he later raised to $90.
Although his latest upper limit has now been breached, analysts do not expect Saturday’s meeting in Ecuador’s capital, Quito, to decide any change in production quotas.
Opec will probably attribute the recent price rise to “temporary” factors, not the fundamental dynamics of demand and supply, said Caroline Bain, senior commodities editor at the Economist Intelligence Unit. “There probably won’t be a change in policy,” she added.
The interests of two of the most powerful countries in the oil market have now coalesced around maintaining a price level of about $75-$90, say other analysts.
This vital convergence has taken place between Saudi Arabia, the world’s biggest exporter of crude oil, and China, the second- largest importer.
The Saudi national budget for 2010 provides for total expenditure of $164.5bn. Assuming the kingdom produces 8.3m barrels a day, paying these bills and securing a surplus of $5bn for safety requires an oil price of $74.
Meanwhile, China introduced a new policy last year designed to achieve self-sufficiency in refined oil products. This guarantees profit margins for Chinese refineries of 5 per cent, assuming a crude oil price of $80. The margin falls to 3 per cent at an oil price of $90 – and to zero when a barrel costs $100.
Consequently, Saudi Arabia must preserve oil prices above $74, while China needs to keep them below about $90 in order to guarantee acceptable refining margins. In April, China chose to exert downward pressure on prices by reducing its crude imports for the month by 11 per cent below their six-month average.
Julian Lee, of the Centre for Global Energy Studies, said it was “serendipitous that we’ve seen Saudi Arabia and China protecting the two ends of the range that prices have been moving in”.
If prices stay above $90, China may again reduce its crude imports to cool the market; alternatively, Beijing could review its refining policy. “Which way China will jump is one of the uncertainties that the market is living with,” said Mr Lee.
In theory, Opec could choose to help China by raising production quotas during the Quito meeting. The aim would be to achieve two objectives at a stroke: prices might be held below $90, while lifting the limits would also formalise some of the club’s overproduction above the existing quotas, which were last revised in December 2008.
But in practice, the countries that exceed their quotas, notably Iran, Venezuela and Nigeria, also want high prices. So, they “don’t want a rise in ceilings because that would allow Saudi Arabia to produce another 1m barrels per day or so and that would depress prices,” said Ms Bain.
Opec will probably resolve these competing forces by leaving its quotas unchanged at Quito.
At present, member states are keeping about 5.5m b/d off the market. Tampering with this would risk an overreaction, perhaps causing prices to fall uncomfortably low.
Ann-Louise Hittle, of Wood Mackenzie, the oil consultancy, said Opec members would not want to “risk what they’ve gained in terms of keeping oversupply off the market”. The Quito meeting will probably choose to “wait and see”, keeping quotas as they are.