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OPEC tries to hold $70/bbl oil

Economic growth, Oil markets
By Paul Hodges on 15-Oct-2008

OPEC has called an emergency meeting for 18 November to discuss measures to combat collapsing oil prices. But as the blog noted last week, by then they could be looking to defend $50/bbl. And it seems Saudi Arabia agrees. Market reports suggest ‘the world’s top oil exporter has already started cutting oil supplies to European refineries’.

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OPEC faces a difficult few weeks. It would be political suicide, just before the US Presidential election, to announce production cuts today. Equally, oil markets could quickly tighten in Q1, if the northern hemisphere has a cold winter. That could end prices soaring, just as a new President takes office.

Yet Saudi Arabia needs $60/bbl oil to balance its budget, Venezuela perhaps $90/bbl. Western oil companies also need high prices. Last month, Total’s CEO Christophe de Margerie said Angolan exploration required $70/bbl to be viable, whilst Canada’s oil sands needed $90/bbl. So any short-term price fall could mean higher prices later on, if crucial projects to maintain future supplies were now to be cancelled.

But this kind of logic is too complex for the US campaign trail. Hence the Saudi move to discreetly cut production now, away from the headlines, and postpone formal OPEC discussion. It rarely pays to bet against the Saudis, so $70/bbl could be at least a temporary floor. But they have a tough few weeks ahead.