Crude oil futures would need to fall to about $37 a barrel before OPEC decides to cut production, according to a person familiar with the thinking of the cartel’s top officials.
That would set OPEC’s next trigger price a few dollars below the level its president had recently suggested.
Last week, the Organization of Petroleum Exporting Countries decided not to rein in production, as the price of light, sweet crude oil futures hovered near $47 a barrel. But the Vienna-based cartel left open the possibility of an output cut before its mid-March meeting. What remains to be seen is how far prices would have to fall before OPEC takes action.
At an informal meeting last week in Davos, Switzerland, where global financial leaders met for the annual World Economic Forum, several OPEC representatives signaled that the cartel would not reduce its official output unless prices fell by roughly $10 a barrel from levels at the time, according to a source who attended the meeting, speaking only on condition of anonymity.
“That’s my reading,” the source said.
Light sweet crude for March delivery rose Friday on the New York Mercantile Exchange. Oil prices are roughly 40 percent higher than a year ago.
Those who participated in the informal meeting in Davos included: Sheik Ahmad Fahd al-Ahmad al-Sabah, Kuwait’s oil minister and the OPEC president; Ali Naimi, the Saudi Oil Minister; Adnan Shihab-Eldin, OPEC’s acting secretary general; Fatih Birol, chief economist of the International Energy Agency and Daniel Yergin, chairman of Cambridge Energy Research Associates.
Al-Sabah had told reporters at last week’s OPEC meeting that he considered $35 a barrel to be a “suitable price” for OPEC’s basket of crudes, which are trading roughly $6 lower than Nymex oil futures. OPEC suspended its official $22 to $28 a barrel price band on Jan. 30.
Commenting on the likelihood of prices dipping to around $37 a barrel, John Lichtblau, chairman of the New York-based Petroleum Industry Research Foundation, said Friday that “anything’s possible in this market, it’s a very volatile market, but at the moment there is no indication that prices will go down to that level before March 16,” the date of the next OPEC meeting.
Oil demand is rising along with the global economy, “but there aren’t any new supplies coming on that would drive prices down,” Lichtblau said. “I think OPEC is surprised at how high the price is.”
After a production cut of 1 million barrels a day went into effect in January, OPEC’s official quota stands at 27 million barrels a day. But the 10 members of the group subject to the quota — Iraq is not bound by a limit — are believed to be overproducing by about 500,000 barrels a day in order to take advantage of the high prices.
Peter Beutel, president of Cameron Hanover Inc., said in a research note Friday that “it is generally assumed that there is a price level at which OPEC ministers will make frantic calls to one another to cut oil production. The market just is not certain at what price that will occur.”
He added: “Our estimate is that OPEC’s hawks will start chirping around $43 a barrel. If prices get to $39 a barrel, we would expect an output cut.”
Tom Bentz, a broker at BNP Paribas Commodity Futures in New York, said the fact that OPEC has made clear its willingness to prevent prices from falling too far is keeping upward pressure on oil futures.
“Traders are still a bit skittish about being short under $46,” Bentz said. Being “short” refers to making a bet that prices will fall.