Saudi Arabia still wants Brent at $100 per barrel

11.12.2012 - 19:45

On 11 December, crude-oil futures inched higher as oil traders waited for news from the Organization of the Petroleum Exporting Countries (OPEC) and the US Federal Reserve.

Benchmark crude for January delivery was up 58 cents to $86.14 a barrel in electronic trading on the New York Mercantile Exchange. Brent crude was up 87 cents per barrel to $108.20 on the ICE Futures exchange in London.

On 12 December, both OPEC and the US Federal Reserve's Federal Open Market Committee are expected to wrap up meetings.

OPEC is expected to keep output unchanged. However, OPEC ministers, in particular Saudi Arabia’s Oil Minister Ali al-Naimi, are expected to use this week’s meeting in Vienna to again push for Brent to average closer to $100 per barrel, Chris Weafer, chief strategist at Moscow’s Sberbank Investment Research, wrote in an e-mailed note to investors on 10 December.

“The Saudis have been consistently talking about both the ample existing supply and the dangers posed by higher-for-longer oil prices to economic growth,” Weafer wrote. He reminded that Saudi Arabia’s Oil Minister successfully talked the price down from over $120 per barrel to under $100 per barrel in the spring against a backdrop of renewed global growth concerns.

Justin Urquhart Stewart, marketing director of Seven Investment Management, told New Europe by phone on 11 December that Riyadh will be doing their best to try and talk it down again because they need the global economy to keep on track. “The American economy is showing some signs of recovery. Therefore, they all want and try make sure that recovery continues,” he said.

Weafer wrote that at their 12 December meeting, Riyadh has another chance to push the price lower. He explained that Saudi Arabia and moderate producers within OPEC have tried to target $100 per barrel average Brent because: Higher oil may slow the global economic recovery; higher oil increases the incentive for investment in alternative energy sources; a lower oil price may slow the pace of the currently fast production growth in Iraq and would also add to the economic pressures on OPEC-member Iran.

“Saudi Arabia can balance its budget at close to $100 per oil barrel and would much rather have price stability around this level than see the risk of a big fall in 2014 increase,” the Sberbank chief strategist wrote.

On 11 December, Andreas Andrianopoulos, former minister of Greece and director of the Institute of Diplomacy and Global Affairs DEREE, told a Greece-NATO session on energy security in Athens that the risk premium is now factored in the oil price, highlighted by the risk of a terrorist attack as well as concerns about Iran, Syria and Israel-Hamas. “The price you pay at the pump has little to do with oil,” he said.

Urquhart Stewart told New Europe from London that the political risk premium has not gone away at all. “It probably has gone up in terms of what’s the next stage with Syria and the rest of the Middle East. But all more reason therefore to try to give more confidence to the rest of the global economy rather necessarily falling back on political unrest again,” he said.

Meanwhile, oil traders are also anticipating that the Fed will try to boost the US economy. “The Fed at the moment will be tapping their fingers on the table with irritation looking at the politicians, waiting for them to finally reach agreement over the deficit and fiscal cliff,” Urquhart Stewart said. “And as far as the Fed is concerned they must feel so frustrated at the moment that they have done everything possible. But the politicians still aren’t acting properly so they will make warm and cuddly noises to the markets, but they will be glancing in an accusing manner at the American politicians for them to solve their house up,” the London-based analyst added.

If US President Barack Obama gets bipartisan agreement that will be extremely positive and then the Fed will be more co-operative, he said.

Meanwhile, Europe is looking across the Atlantic. “Europe needs America to be steady in terms of fiscal cliff to see if they can get growth back on the agenda,” Urquhart Stewart said. “The encouraging thing I would suggest actually in Europe is that the flat-lining in the German economy over the confidence figures are up will probably mean that Mrs Merkel will have to have a more growth-focused policy - she has an election within the next year - and if she does that, that will change the mood music for the rest of Europe,” he concluded.