Oil Price at $70 a Barrel Would Likely Trigger Cut in OPEC Output Ceiling
OPEC Officials Don’t Expect Oil Price Below $75 a Barrel This Year
An oil refinery on the east coast of Saudi Arabia, OPEC’s largest producer. European Pressphoto Agency
Oil’s more-than-25% decline since the summer has led to speculation that the Organization of the Petroleum Exporting Countries—whose crude accounts for around a third of global oil supply—would cut its output to try to support prices, especially as some of the group’s members grow fearful of the likely hit to their government budgets.
At a news conference in Vienna on Thursday, OPEC secretary-general Abdalla Salem el-Badri said the group is “concerned, but we are not panicking.” Mr. el-Badri blamed market speculators for the sharp oil price drop, saying “fundamentals don’t deserve this price decline.”
Despite his comments, some within OPEC are already thinking about the oil-price level at which the group will be forced to respond, with $70 a barrel for Brent crude emerging as the key threshold.
“At $70 a barrel, there will be panic in OPEC. We have become used to living with $100 a barrel,” said one OPEC official, speaking on the sidelines of a meeting of governors and other officials from the 12 OPEC member nations this week, ahead of a full OPEC ministerial meeting on Nov. 27.
Were prices to fall to “$70 a barrel, there will be action from OPEC,” according to another OPEC official. December Brent crude on London’s ICE Futures exchange fell to $82.55 a barrel on Thursday. The front-month for U.S. benchmark West Texas Intermediate crude fell to $77.76 per barrel on the New York Mercantile Exchange.
OPEC officials in Vienna said they don’t expect oil to fall below $75 a barrel in the near-term, while Mr. el-Badri said he expected prices to rebound in the second half of 2015.
But as the full OPEC meeting approaches, some within the group are less calm.
“We will discuss all mechanisms…to keep prices within a range of between $90 and $100,” at the Nov. 27 meeting, Pedro Merizalde, Ecuador’s minister of nonrenewable natural resources told The Wall Street Journal late Wednesday. “Many analysts say there is too much oil in the market.”
If oil prices were to fall to $70 a barrel for an extended period it would put pressure on most OPEC members, who will need higher prices for their fiscal budgets to break even next year, according to estimates from Deutsche Bank .
Venezuela, for example, would need crude to average around $117.5 a barrel next year to balance its budget, Deutsche Bank forecasts. But the price of its basket of heavy crude and refined products fell by nearly $4 to $72 a barrel as of Thursday, government officials said.
“There is a war of prices,” the country’s oil minister, Asdrubal Chavez, said at a National Assembly hearing on Thursday.
Venezuela’s foreign minister and OPEC representative, Rafael Ramirez and Saudi Arabia’s oil minister Ali al-Naimi held a rare bilateral meeting late Wednesday amid oil’s slump.
Despite the rising nerves within OPEC, no officials yet expect the group to cut the self-imposed limit on its oil output when the ministers meet. OPEC currently sets a 30-million-barrel-a-day ceiling on its collective production, though in practice it often exceeds the limit. OPEC members together produced 30.7 million barrels a day in September, according to the International Energy Agency. Any cut to the ceiling would imply that OPEC is looking to restrict oil supply in the face of weakening global demand growth.
The shut-down of 300,000 barrels a day of Libyan supply Wednesday following an attack by rebel militias on a key oil field there has damped any appetite for an actual production cut.
“Libya has done the cut for us,” said one OPEC official, who had previously advocated a reduction of 500,000 barrels a day.
Even so, OPEC itself expects its output to fall over the medium term as oil supply grows elsewhere, mainly thanks to rising shale-oil production in the U.S. In its annual energy outlook, OPEC said its crude production would fall by 1.8 million barrels a day by the end of 2017 to 28.2 million barrels a day from 30 million barrels a day this year.
—Kejal Vyas contributed to this article.
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