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What oil near $90 may mean for OPEC policy

LONDON - Oil prices are at a 25-month high and approaching $90 a barrel, raising the question of whether the Organization of the Petroleum Exporting Countries will raise output.

The 12-member OPEC which pumps more than a third of the world’s oil, has kept its oil output target at 24.84 million barrels per day (bpd) for almost two years since announcing a record supply cut after prices slumped in 2008.

It meets on Dec. 11 in Quito, Ecuador.

Oil hit $88.63 a barrel on Thursday, the highest since October 2008. It has been supported by the new round of U.S. economic stimulus which has weakened the U.S. dollar, record Chinese demand and falling U.S. inventories.

Following are scenarios on what the rising oil price may mean for OPEC policy.

DO NOTHING

OPEC is unlikely to change its formal output policy yet, despite the rise in prices.

“They will probably say something along the lines of above $90 is not justified, but I don’t think they really want to do anything at the moment,” said Andrey Kryuchenkov, commodities strategist at VTB Capital.

Signs of an upward shift in the price aspirations of key OPEC members — the group as a whole has no formal price target — have bolstered oil this month.

Saudi Arabian Oil Minister Ali al-Naimi said on Nov. 2 oil at $70 to $90 was comfortable for consumers. That was above the $70 to $80 range the top exporter had for two years called ideal.

An official from the International Monetary Fund said the rise in prices was not a threat to global economic recovery, in effect backing the view that consumers can live with current prices.

“It will not act for a while … not until we get to $100 or inventory levels fall,” said Tony Nunan, a risk manager with Mitsubishi Corp in Tokyo.

Some OPEC members will be enjoying the rally and have made clear they would like it to go further.

Libya has called for oil to reach $100 and Venezuela said it was looking for oil between $90 and $100 in 2011.

Informally raise output

As likely as no change in formal policy, extra OPEC production could result from further reductions in compliance with output targets unless prices fall.

Adherence by OPEC as a whole to 4.2 million bpd of output cuts announced in December 2008 has declined to 51 percent, according to estimates published in OPEC’s monthly oil market report on Thursday.

That means OPEC is pumping more than 2 million bpd above its formal output target in response to recovering demand and higher prices. Compliance with the output curbs peaked near 80 percent in 2009.

“They should be acting already. Prices are near the top of their preferred range. We will see slowly increasing OPEC supply in lower compliance to quotas,” said Thorbjorn Bak Jensen at Global Risk Management in Denmark.

OPEC says it holds more than 6 million bpd of unused oil production capacity as a result of the supply curbs agreed two years ago, a comfortable cushion equating to 7 percent of world demand.

Much of this is held by Saudi Arabia, with smaller amounts in Kuwait and the United Arab Emirates.

The Gulf members are among the most compliant with their targets, and so far there is no sign of that discipline breaking down. That could limit the scope for OPEC production to creep significantly higher through quota leakage.

Saudi Arabia, keen to preserve long-term demand for its extensive reserves, has traditionally stepped in to add more oil if it considers the market is rising too fast.

Riyadh could face a dilemma on whether to do so if that rise is mainly a result of U.S. monetary policy weakening the dollar, rather than extra demand for oil.

Output rise

Analysts see a further rise in prices towards $100 would be required before OPEC considers raising its output target.

“If we reach $100 they might really do something about quotas. If we reach $100, I think we will have a new scenario for OPEC,” said Frank Schallenberger of Landesbank.

So far, ministers and officials have said they see no need to raise supply.

The are signs that oil’s supply and demand fundamentals — from OPEC’s point of view — are improving. Forecasters including OPEC itself have been raising estimates of global demand. U.S. crude and fuel inventories fell last week.

Even so, OPEC would probably want to see more evidence of a tightening market before it responds. Its report on Thursday said inventories were not expected to change much in the run-up to the northern hemisphere winter.

“As a result, the market should be well prepared even if the winter demand turns out to be stronger than expected,” OPEC said.