OPEC Clashes With Goldman on $75 Oil as Demand Slumps

By Ayesha Daya and Maher Chmaytelli

Dec. 15 (Bloomberg) -- OPEC, the producer of 42 percent of the world’s oil, may make the biggest supply cut in a decade to halt the plunge in crude prices as demand drops for the first time since 1983.

The Organization of Petroleum Exporting Countries will probably lower output targets by at least 2 million barrels a day, or 7.3 percent, when its members meet Dec. 17, according to 18 of 33 analysts surveyed by Bloomberg. While Saudi Arabia’s King Abdullah said last month that his country needs oil priced at $75 a barrel to spur development, Goldman Sachs Group Inc. predicts crude may slide to $30 from $46.28 today.

Oil’s $100 a barrel collapse since July ended a windfall that quadrupled OPEC export revenue in five years, instead creating government budget shortfalls. Ecuador, a member of the group, said last week it will default on foreign debt. The U.A.E., Kuwait and Qatar need crude above $55 to balance their current accounts and fiscal spending, Citigroup Inc. estimated.

“There is a real danger of oil going down to $30 a barrel unless OPEC acts boldly and decisively,” said David Hufton, managing director of PVM Oil Associates Ltd. in London, the world’s largest broker of over-the-counter crude trading between banks, hedge funds and oil companies.

Prices tumbled from a record $147.27 on the New York Mercantile Exchange in July to a four-year low of $40.50 just five months later. Crude for January delivery rose as much as $1.13, or 2.4 percent, to $47.41 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $47.41 at 10:38 a.m. in Singapore.

‘Severe’ Cut

OPEC President Chakib Khelil said Dec. 11 ministers had reached a consensus that a “severe” cut is needed at the meeting this week in Oran, Algeria. Qatari minister Abdullah bin Hamad al-Attiyah, Venezuela’s Rafael Ramirez and Libya’s Shokri Ghanem also said they are prepared to reduce supplies. The group agreed in October to reduce production by 1.5 million barrels a day, starting Nov. 1.

“With oil having dropped to sub-$50, the Algeria meeting puts them under pressure to cut again,” said Mike Rothman, oil research head at International Strategy & Investment Group in New York, and former chief energy strategist at Merrill Lynch & Co.

OPEC’s struggle to revive prices follows six years of gains as global growth accelerated, led by China. Rising prices led investors and pension funds to pour more than $200 billion into commodities, seeking greater returns than those offered from stocks and bonds.

Bubble Burst

The resulting bubble in oil, grains and metals burst in July, as the collapse in the U.S. subprime-mortgage market saddled financial companies with almost $1 trillion of losses and writedowns and led to the failure of Lehman Brothers Holdings Inc.

As investors fled commodity markets, outstanding oil futures contracts, called open interest, tumbled 23 percent in New York to 1.16 million.

Oil could fall below $25 next year as the recession limits demand, Merrill Lynch commodity strategist Francisco Blanch in London said Dec. 4. Benjamin Dell, an oil analyst at Sanford C. Bernstein & Co. in New York, said it may take a year for prices to rebound.

The U.S. recession threatens to become the longest of the postwar era as companies cut workers and investment, with real gross domestic product forecast to contract 0.8 percent in 2009, according to estimates compiled by Bloomberg.

Weakness in the world’s largest economy is leading this year’s 200,000 barrel-a-day decline in global oil demand to 85.8 million a day, according to the International Energy Agency in Paris. Oil use hasn’t fallen since 1983, when U.S. interest rates of more than 9.25 percent stifled growth.

Wait a Year

“Investors should focus on three signals, a recovery in U.S. gross domestic product, a return to positive global oil consumption and a stabilization in the U.S. dollar,” Dell wrote Dec. 10. “We expect all three by late 2009.”

PVM’s Hufton said the 13-nation OPEC needs to lower supply 1.5 million barrels a day, with Russia, which isn’t a member, idling 500,000 barrels a day, to avoid oil falling to $30 later this month. That would remove 2.3 percent of global production, based on the IEA’s third-quarter supply figures.

After agreeing to trim output in September and October, members have yet to fully deliver on their promises, pumping 932,000 barrels a day more than the target of 27.3 million a day in November, according to estimates compiled by Bloomberg. Compliance is “not good enough,” OPEC Secretary-General Abdalla El-Badri said on Nov. 30.

Saudi Revenue Falls

As OPEC stalled, New York oil futures plummeted, touching $40.05 on Dec. 5. Futures prices exceed $75 a barrel for delivery after 2013, indicating traders doubt $40 crude is sustainable.

Saudi Arabian Oil Minister Ali al-Naimi said Dec. 11 that the world’s largest exporter pumped 8.493 million barrels a day in November, which would be close to its OPEC quota and about 290,000 barrels a day less than the IEA has estimated.

The drop in prices means Saudi Arabia’s daily oil revenue has plunged about 66 percent, or $800 million a day, based on a 1.1 million barrel-a-day reduction in output through November, from July’s peak.

Venezuela’s economy probably will contract next year as lower oil revenue forces the government to trim spending, Morgan Stanley said last week. Iran’s Central Bank said last month that the country will face “big trouble” with oil below $60.

Khalid al-Falih, who will become chief executive officer of Saudi Aramco, the world’s biggest oil supplier, warned on Dec. 11 that falling oil prices will hurt investment in new fields, hampering the ability of producing nations to meet growing demand in future.

Brazilian Oil Fields

Goldman Sachs analysts Giovanni Serio and Jeffrey Currie identified 30 oil projects that require a price of $55 to break even, according to a Dec. 10 research note. Those ventures include Petroleo Brasileiro SA’s Tupi field, the biggest oil discovery in the Americas since 1976, and deepwater concessions in Angola belonging to BP Plc and Total SA.

Oslo-based StatoilHydro ASA and Royal Dutch Shell Plc of The Hague postponed investments in Canada’s oil sands this year after tumbling prices reduced potential profits.

OPEC will struggle to raise prices for now, said David Kirsch, a Kansas City-based industry consultant with PFC Energy.

“Even if OPEC tightens up crude, you’re probably not going to see a dramatic increase in prices, because refiners still won’t want to process it,” he said. “What OPEC needs to do is prevent a glut from forming in global inventories. That’s what led you to $9 a barrel in 1998.”

To contact the reporters on this story: Ayesha Daya in Oran, Algeria at adaya1@bloomberg.net; Maher Chmaytelli in Oran, Algeria at mchmaytelli@bloomberg.net