Saudi plays hard-ball on oil prices

Economic growth, Oil markets

OPECright.jpg

A month ago, with WTI at $70/bbl, the blog suggested that:

“If refiners are forced to cut runs for December, then it would be hard for OPEC to cut its own production quickly enough to compensate. In that case, a $20 – $30/bbl range for crude, albeit temporarily, would not be impossible.”

During November, prices then slipped to $50/bbl. And since OPEC’s failure last weekend to announce any production cuts, WTI has fallen to $40/bbl.

Saudi Arabia clearly played hard-ball at the OPEC meeting. Whilst highlighting their desire for $75/bbl, they did nothing to make it happen. Instead, as the perceptive Petro-Matrix has noted, they were “almost inviting market participants to push prices lower to pressure better OPEC compliance and some non-OPEC participation in the next round of cuts”.

The Saudi position is entirely logical. They knew perfectly well that with oil at $50/bbl, many OPEC members would have signed up for production cutbacks, but then cheated on their quota. Saudi would then have been forced to make up the difference, at a huge cost to its revenue. But now prices have come closer to $30/bbl, compliance should be better. Fear of complete disaster is a great motivator.

Oil markets are not for the faint-hearted. OPEC now needs to make large, credible, cutbacks at their next meeting on 17 December. Otherwise the price fall could easily become self-perpetuating. After all, this week’s $200/t benzene prices imply an oil price of $12/bbl on normal price and cost relationships.

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