OPEC Defends $100 Oil

I had a feeling we were going to see this pretty soon in response to falling oil prices. It seems that OPEC has grown fond of the idea of oil >$100/bbl. Iran and Venezuela have both been making noise about the need to cut production to defend that price, and today OPEC announced that they would indeed be cutting production by half a million barrels a day:

Oil Rises After OPEC President Calls for End to Overproduction

Sept. 10 (Bloomberg) — Crude oil jumped in New York as OPEC President Chakib Khelil called on members to stop producing more than the group’s set quota, a move that would reduce supplies by 520,000 barrels a day.

The Organization of Petroleum Exporting Countries agreed to cut daily output to their 28.8 million-barrel limit, Khelil said in Vienna today. The group kept its output quota unchanged after adjusting for the departure of Indonesia and including new members Angola and Ecuador.

“It’s definitely a defensive measure to keep prices above $100,” said Jonathan Kornafel, a director for Asia at Hudson Capital Energy. “They don’t want to see us go back to $140 or $150 but they want us over $100. It’s a bit of a shock to the market and that’s why we’re up.”

Just another ‘above ground’ factor that is going to keep oil from falling much below $100. OPEC has the pricing power to achieve this. In fact, a big part of the reason the price got there in the first place was that OPEC cut too much for too long a couple of years ago. Not only did this tighten up supplies, but it also led to a lot of speculation that OPEC oil production had peaked.

As far as not wanting us to go back to $140, I wouldn’t go that far. I think they want to maximize their long-term revenues. If they can get $140 without causing a recession and destroying demand, then I think they would be quite happy with $100 oil. In fact, I recall when some in OPEC were saying that $100 was too high.

6 thoughts on “OPEC Defends $100 Oil”

  1. OPEC members have a history of producing more than their quota when they can (the stats show the biggest overproducers are Saudi Arabia and Iran), and they also have a history of continuing to produce more than their quota despite agreeing to stop doing so. This agreement basically says “we’re not doing what we said we’d do, so now we’ll say it again and maybe it’ll come true”. Until actual production drops, it means nothing. Many governments got used to big spending and need to continue it to prevent popular unrest. As prices fall, there is a tendency to try to sell more to keep total revenue high. Having traded oil back in the old days when overproduction was a given for many OPEC members, color me sceptical.

  2. I am sure that Venezuala and Iran want to keep oil over $100/bbl, but both countries are broke they will urge restraint on others and cheat. The Sa’uds will probably keep pumping in order to screw the Iranians.

  3. Peakers will claim this is just a smokescreen to hide the fact that OPEC’s production has entered terminal decline.

    Will OPEC repeat the mistake of the early ’80s and actually cut production? This action is small, but if they follow up with more cuts things will get very interesting.

  4. Okay, I’ll take the bait.
    OPEC is quaking in its boots about the GM Volt.
    Actually, I think this price correction is nothing more than speculation. The speculative price oil is the market price of oil. The CFTC has already said that more than 80 percent of contracts traded are by speculators, and that 80 percent might yet underestimate the true level. It is a speculators’ market.
    Nate Hagen of The Oil Drum recently opined on his site that a single speculator, liquidating their position, is responsible for a large portion of the recent price dump.
    Okay — then it holds that many and larger speculators, accumulating positions, were the reason for the $147 price spike. Speculators can set market prices for a long time as the demand for oil is relatively inelastic. In the medium to longer-term, you do see elasticity, and plenty of it. In the short run, and you get a price that is set on the NYMEX, not in the real marketplace — for several years at a stretch.
    At $147, we reached point (at long last) where accumulating responses to higher prices, and some amount of immediate demand destruction, broke the market.
    We may see now a rout, and the price of oil could fall below its “true” market price, in a speculative excess on the downside. This will happen if commodity and other funds (sovereign, hedge funds etc) must iquidate their positions. It could snowball on the downside.
    My own view is that any price above $80 sets into motion longer-term corrections. Demand will falter, alternative supplies will boom.
    I recently investigated palm oil plantations, and the good news is that due to better stock, yields can be twice as high than just 10 years ago.
    It may actually make sense, even with American labor costs, to plant palm oil plantations in Louisiana and Texas (need water).
    I advise anybody who wishes to retire to those areas to consider buying 20 acres of land, and planting palm oil trees. You can buy a used expeller on Ebay for $3,000, and sell all the palm oil you make for $2 to $3 a gallon on Craigslist.
    Your yield per acre, if you plant the best trees (which are short, by the way)should be about 10 tons per hectare, or about 4 tons per acre, which is roughly 4000 liters per acre, or roughly 1000 gallons per acre.
    So, you can make $2-3k per acre, and $40-60k per year on your handsome palm farm. Hire some guy part time to help you harvest and expell the palm nuts.
    I plan a version of this in Thailand, if my wife still loves me by then.
    Otherwise, maybe Cajun food is the way to go.
    Thanks to thug oil states and speculators, the price of oil from time to time will soar to more than $100 a barrel. You can fret about it, or plant your palms.

  5. IMHO, oil prices have to stay at >$100/barrel in order to put sufficient pressure on real solutions like SPHEV and efficiency. Not to mention conservation.

    This OPEC decision is not so bad. Not so bad at all. In fact I'd concure with those who have asserted that high oil prices are a blessing in disguise.

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