Monday, May 17, 2010

OPEC Could Cut Production if Oil Prices Continue Their Slide

Just over one month ago, when oil prices were rising, Kuwait’s oil minister said that OPEC wouldn’t consider increasing oil production to combat high oil prices that could threaten economic recovery until the price of crude oil hit $100 a barrel. Now that crude oil prices have declined by 17 percent in May, even falling below $70 a barrel at times on Monday, BusinessWeek reports that oil analysts are wondering when OPEC will cut output to prop up oil prices.

For months OPEC has affirmed its satisfaction with current oil prices. In December, Saudi oil minister Ali al-Naimi said oil prices between $70 and $80 a barrel were “perfect,” and OPEC general secretary Abdalla El-Badri has said that prices between $70 and $90 a barrel provided incentive to producers to expand production without being so high that they would force people to cut consumption. A price below $70 a barrel “does not give [OPEC members] an incentive to invest,” said Qatari energy minister Abdullah bin Hamad al-Attiyah on Monday. Kuwaiti minister Ahmad Al-Abdullah Al-Ahmad Al-Sabah said that if crude oil hit $65 a barrel it would “ring a bell” for OPEC to act before their next scheduled meeting in October.

Though OPEC has not changed its production quotas since December 2008, when it cut output sharply because of lost energy demand during the recession, compliance with those quotas has eroded as members ramp up production in pursuit of greater profits. If OPEC decided to restrict oil supply and keep prices high enough to encourage further oil exploration, the cartel could do so simply by enforcing existing quotas rather than changing quota levels.

These recent statements by OPEC members effectively put a price floor of $65–$70 on crude oil. While heating oil users can expect lower prices as falling prices on the NYMEX translate into lower retail heating oil prices, OPEC stands prepared to limit how far oil prices may fall. Having survived the 2008 collapse in oil prices when crude oil traded for as little as $33 a barrel, OPEC is determined not to let prices reach those lows again. For heating oil users, that means the ultra-cheap heating oil of a little over a year ago may not soon return.

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