Monday, May 17, 2010

OPEC’s Comfort Zone Threatened by Oil’s Dip Below $70

By Robert Tuttle and Grant Smith

May 17 (Bloomberg) -- Oil prices fell below OPEC’s comfort zone as crude futures in New York dipped below $70 a barrel for the first time since February.

Organization of Petroleum Exporting Countries Secretary- General Abdalla El-Badri has repeatedly said prices between $70 and $90 are reasonable to encourage producers to expand exploration, and Saudi Arabian Oil Minister Ali al-Naimi, representing the group’s biggest exporter, said on March 30 he hoped prices would remain in a $70 to $80 a barrel range.

Oil below $70 “does not give them an incentive to invest” in deepwater production, Qatari Energy Minister Abdullah bin Hamad al-Attiyah said today at a forum in Doha. Prices near $75 would be “reasonable,” al-Attiyah said, adding that OPEC does not have any official price target.

Crude oil for June delivery traded at $71.76 a barrel, up 15 cents, in electronic trading on the New York Mercantile Exchange as of 12:10 p.m. London time after falling to $69.82 earlier today, the lowest price for a near-month contract since Feb. 5. The June contract expires on May 20. In London, July North Sea Brent crude futures are trading near $78 a barrel.

OPEC agreed in March to uphold output quotas for a fifth time. The group slashed production quotas at a meeting in December 2008, after energy demand fell during the worst recession since World War II. Crude oil prices slumped from a record $147 a barrel in July that year to $32 in December.

Members are currently exceeding those allocations by about 2 million barrels a day, meaning they’re completing 53 percent of a promised 4.2 million barrel-a-day cutback, according to Bloomberg estimates.

$65 ‘Bell’

The group uses production levels, set by quotas, as a tool to move oil markets, when ministers agree that prices are too low or too high.

Kuwaiti Minister Ahmad Al-Abdullah Al-Ahmad Al-Sabah said on May 8 that oil priced below $65 a barrel would “ring a bell” for OPEC to hold a meeting before its next scheduled one on Oct. 14. On April 28, when oil was trading near $83 a barrel, Saudi Arabia’s al-Naimi said at a conference in Chicago that prices were at “sustainable levels.”

Speaking in Doha today, Qatar’s al-Attiyah said he supports the price views of King Abdullah of Saudi Arabia. “King Abdullah was the most wise to predict a reasonable price that’s $75 to $80 that both sides, the consumer and producer, can accept,” al-Attiyah said.

Still, JPMorgan Chase & Co. said it is unlikely OPEC will take action soon to halt the price slide, as the organization is more focused on managing inventory levels.

Lower Inventories

“There was a shift in emphasis away from really just saying a fair price was the all-important issue to saying that they wanted to see inventories lower,” Lawrence Eagles, JPMorgan’s global head of commodities research, told reporters in Singapore today. “OPEC has been shown to be right, given the current financial environment, in not doing anything.”

If prices follow the median estimate of 32 analysts compiled by Bloomberg, which anticipates an average of $80.50 for this quarter, there may be no need for OPEC to consider intervention.

Credit Suisse Group’s head of oil and gas James Janoskey said in a May 16 interview that futures will remain between $70 and $90 a barrel.

The organization’s 12 members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

--With assistance from Ayesha Daya in Dubai and Grant Smith in London and Mario Parker in Chicago. Editors: Raj Rajendran, Rob Verdonck.

To contact the reporter on this story: Robert Tuttle in Doha at

To contact the editor responsible for this story: Stephen Voss at

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