What’s OPEC thinking?

Kai Ryssdal Nov 28, 2007

What’s OPEC thinking?

Kai Ryssdal Nov 28, 2007


KAI RYSSDAL: What most people haven’t been counting on lately is falling oil prices. But crude has bubbled down more than 7 percent this week, closed at $90.62 cents a barrel today.

OPEC’s been making some noises about a production increase, but since it can be tough to figure out what makes the cartel tick, we’ve called somebody whose job it is to do that.

Greg Priddy’s an oil analyst at the Eurasia Group — Greg, good the have you here.

Greg Priddy: Thanks.

RYSSDAL: There are some mixed signals coming out from OPEC, if you read the wire copy this morning. What’s your take on a possible production increase?

Priddy: There are often mixed signals that come out before OPEC meetings. I’m of the opinion that they probably are going to increase by a half-million barrels a day at the December 5th meeting.

RYSSDAL: How come?

Priddy: It really is kind of a unilateral Saudi decision at this point. They’re the only OPEC member that has any spare capacity left — everyone else is producing at capacity. And they’re worried about the inflationary and possible recessionary impact in the U.S. economy, and more broadly in the developed consumer economies. They could eventually produce a whipsaw effect in demand that would drive prices down, and they want to avoid that.

RYSSDAL: Is 500,000 barrels a day a stretch for them, or could they pump out some more if they wanted to?

Priddy: Their spare capacity right now is about 1.7 million barrels a day, and they do have the ability to raise production somewhat. It is a heavier, lower-quality oil, though. It’s not necessarily what the market needs right now, but I think they want to make a gesture to be able to tamp down prices.

RYSSDAL: How much are politics factoring in here? I mean, the Saudis were a big presence at the peace conference in Annapolis just yesterday. Are they aware of the relationship with the United States as they think about oil?

Priddy: They do in the big part of their decision-making, and it’s really on a couple of levels. One, they don’t want to see policy responses in the U.S. that would eventually undermine demand for oil. You know, like increase fuel efficiency standards for automobiles and that sort of thing… But on another level, there’s also the security relationship with the United States — they always want to stay, at least to some extent, in our good graces with oil prices, because they’re so dependent on us for their security in the Persian Gulf.

RYSSDAL: What’s the actual supply situation? I mean, 500,000 barrels a day — if they do increase it at the meeting on the 5th of December — really, it’s a drop in the barrel, as it were…

Priddy: Well, inventories have been coming down in the fall, so there is an argument that some additional supply is needed. They increased production a little bit back in September. That was offset in the short term by some field maintenance that was being done in the U.A.E. So there is the argument the market needs a little bit more, it’s not that tight. You do have another factor which is driving it, which is not a supply or demand fundamental — which is money fleeing from other assets as part of the subprime crisis. Money’s coming out of structured debt instruments and going in to commodities, and that’s tending to drive up commodity prices.

RYSSDAL: One more question before I let you go, Greg: How closely are they paying attention to that thing that has oil watchers over here all up in arms, $100 a barrel? Are they interested in the actual price?

Priddy: The $100-a-barrel mark is psychologically important because of the headlines it would generate, in the U.S. in particular, and more broadly. And I think it’s important mainly as a political symbol — that if oil hit $100 a barrel, people would be looking for someone to blame. And I don’t they’re anxious to have that happen right now.

RYSSDAL: Greg Priddy covers oil for the Eurasia Group — Greg, thanks a lot.

Priddy: OK, thanks.

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