Oil below $100 exposes widening divide in OPEC pain thresholds Emergency meet on oil prices not needed, says UAE

LONDON, June 25, (Agencies): Oil’s fall below the $100 a barrel favoured by OPEC exposes the deepening divide between countries in the group better able to cope with a lower price and those most hurt by it, making collective action to halt any further price slide harder. The price of oil dropped below $100 this week from a 2013 high of $119.17 in February, pressured by lacklustre demand and ample supply. While a sustained sub-$100 Brent is bearable for Saudi Arabia, it puts a strain on others such as Iran. There is no immediate prospect of the Organization of the Petroleum Exporting Countries cutting supply to boost the price, not least because top producer Saudi Arabia — which would lead any cutback — has financial reserves that will help it endure oil at $80 or $90.

“Oil at $80 would cause concern with OPEC members outside the Gulf,” said a senior OPEC delegate who requested anonymity. “But there won’t be a quick response from Gulf producers who have built up surplus financial reserves over the past few years.” Others including Iran, Venezuela and Algeria need far higher prices to make their budget targets, and are least able to offer output cuts. The widening division over members’ breakeven oil prices will make a coordinated response harder.

“To have some OPEC discipline is going to be very difficult because everybody for now will want Saudi Arabia to do the job (of cutting production) by itself,” said Olivier Jakob of consultants Petromatrix in Zug, Switzerland. “And if Saudi Arabia does not want to do the job alone, then it needs to let the price drop to force the others to also come in.” OPEC last took united action to prop up prices in 2008 during the financial crisis. Some oil market forecasts indicate that rising supplies of US shale will reduce demand for OPEC oil which could mean cuts are needed down the road.

To an extent, all 12 OPEC members need a robust oil price as crude oil is a major source of government revenue. High production and high prices saw the group that pumps a third of the world’s oil record revenue of $1 trillion last year. Exporters are generally coming to rely on higher prices per barrel to counter pressures including rising populations, stagnant oil output, increased social spending to head off Arab Spring-type protests and infrastructure investment. But the oil price below which an exporting country faces trouble differs widely based both on its budget commitments and the cost of oil production.
Saudi Arabia and fellow Arab Gulf producers Kuwait, the United Arab Emirates and Qatar have greater capacity to handle lower prices. Estimates for Saudi Arabia’s breakeven price vary from $85 to $95, depending on projections for its spending.

After pumping 10 million bpd with oil at $110 last year and 9 million barrels per day (bpd) with oil at above $100 this year, Saudi Arabia has built up formidable financial reserves, estimated at over $650 billion. OPEC met last month and agreed to retain its official 30 million bpd production for the rest of the year — making it unlikely the group will make any formal adjustment to supply. If the time comes for OPEC to scale back production, Riyadh is likely to seek assistance from other members — primarily Iraq, which has ramped up its output in recent years. According to an analysis by Petroleum Finance Co, Saudi Arabia and Iraq need similar prices in order for their current accounts to break even. But Saudi would be better able to withstand a drop due to its foreign exchange reserves and ability to borrow.

Iran is the most at risk as its crude oil exports have more than halved over the past 18 months to around 1 million bpd due to US and European sanctions over its nuclear work. Tehran needs an oil price of $140 in 2013 to balance the books, according to the International Monetary Fund, the highest among the OPEC members it provided figures for and much higher than $84.50 for Saudi Arabia. “Iran’s domestic budget is almost out of control and the cost of doing business with the outside world is rising,” said Mehdi Varzi, a former Iranian oil official who now runs an energy consultancy in the UK. “It’s very expensive to run the economy and the squeeze will get worse.”

United Arab Emirates Energy Minister Suhail al-Mazrouei said Tuesday that there was no need for an emergency conference of OPEC members to discuss the status of oil prices which he described as “fair and acceptable”. “The current fluctuations in oil prices are normal. The price is fair and acceptable to producers and consumers and does not impact the level of investments needed by the oil industry in producing nations,” Mazrouei said in remarks to official news agency WAM. “There is no need to hold an extraordinary conference for OPEC.” Oil prices edged lower in cautious Asian trade Tuesday, as dealers await a series of US economic data for clues on when the Federal Reserve will begin winding down its massive stimulus programme. New York’s main contract, West Texas Intermediate light sweet crude for delivery in August, was down 57 cents at $94.61 a barrel in afternoon trade and Brent North Sea crude for August delivery shed 39 cents to $100.77.

At a regular meeting for the Organisation of Petroleum Exporting Countries in Vienna last month, oil ministers maintained the cartel’s production at 30.0 million barrels per day. But the International Energy Agency, which advises oil consuming nations, said two weeks ago that OPEC crude oil supply rose by about 135,000 barrels in May to the highest level for seven months at 30.89 mbpd. At the same time, the IEA revised down its forecast for demand for crude from the 12-nation cartel to 29.8 mbpd in the second half of this year as the global economic rebound is expected to be faint than previously forecast. The IEA estimated OPEC’s effective spare production capacity at 3.23 mbpd in May, down from 3.47 mbpd in the previous month. OPEC heavyweight Saudi Arabia led the production gainers, with output jumping by 220,000 bpd to a six-month high level of 9.56 mbpd, which IEA put down to a seasonal increase for domestic use to meet peak air-conditioning needs. Kuwaiti production edged up to 2.84 mbpd as did UAE output to 2.73 mbpd, while Qatar was unchanged at 725,000 bpd.

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