zman’s Energy Brain

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OPEC cuts of meaningful size unlikely

Posted by zmann on October 3, 2006

Yesterday a guy from Platts explained how Saudi Arabia can rebalance the OPEC basket oil weightings, shifting the OPEC price higher, and thereby turning potential buyers away. In this way, they don’t announce a production cutback but effectively produce less due to lower demand. tricky, tricky, tricky. Looking for a source for this change in weighting which should occur (if it does) Tues or Wed.

Either way there are stories out about how OPEC is now more disfunctional than ever . They completely ommitted quota talk in last meeting’s press release so I don’t believe there is a statement coming in the near term and am holding my oily puts. Also, what happened to the oil price band mechanism? The last one I remember was like $25-$35 but I’ll have to check.

Anyway, Saudi has been producing well over quota for most of the last 12 months (although its production has been coming down) because other members couldn’t keep it up with their shares.  With fewer buyers above $60, are they more likely to take a five dollar hit (selling oil for $55) or officially take down production (remember, it’s been dipping anyway) in a meaningful manner (1.5 mm bopd). Taking the production would mean shouldering a much greater financial burden than that $5 drop.  Also, when you move from saying that a commodity is in tight supply to one in which you admit that production needs to be curtailed, you lose pricing power. In that event, any “pop” in oil prices has historically been fleeting. In that case Saudi is both taking the price and the production hits – not something you want to do when you’ve 5,000 hungry princes to feed.

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