Saudis Talk $75 Oil; Market May Aim at $35

NEW YORK (Dow Jones Newswires), December 2, 2008

The market sets the price of oil, Ali Naimi, the Saudi Arabian oil minister, has often said, in side-stepping talk of oil price targets.

So it was big news Saturday when Saudi Arabia's King Abdullah told a Kuwaiti newspaper in a wide-ranging discussion that "the fair price of oil is $75 a barrel."

But the Saudis aren't looking for a quick 50% jump in oil prices.

Naimi repeated the king's view at consultative meeting of OPEC ministers in Cairo, called to arrest the collapse in prices which have shed nearly $100 a barrel in the past four months and plunged to a 3-1/2 year low of near $50.

More telling, though, isn't what the Saudis said, but what they didn't say.

No timetable was given for when $75 a barrel should be achieved, nor was a strategy laid out for further output cuts to mop up excess supply in the market, where global oil demand threatens to show the first annual drop since 1983. By contrast, the king's concern over rising oil prices in June led him to summon representatives from oil-producing and consuming countries to a meeting in Jeddah and a clear directive for Naimi to push output up to a 25-year high of 9.7 million barrels a day.

OPEC deferred consideration of further cuts to its already planned Dec. 17 meeting in Oran, Algeria.

The Saudis' hollow comments on prices were meant to echo among fellow OPEC members like Venezuela, which is advocating a return to $80-$100 a barrel oil prices, and sent as acknowledgment to consumer countries that oil prices can't stay depressed for too long without putting future production capacity at risk.

While Iran, OPEC's second-biggest producer behind the Saudis, said a 2-million-barrels-a-day output cut is needed at the Algeria talks, Naimi raised the notion that OPEC might not need to cut at all when it meets on Dec. 17.

No Guarantee of Dec. 17 Cut  

If OPEC compliance is at 80% of the 1.5 million barrels a day output cut agreed on Oct. 24, meaning that about 1.2 million barrels a day has been taken out of the market, no further cuts are needed in Algeria, Naimi told the Al-Hayat newspaper.

That's further confirmation that Saudis don't want to shock the fragile global economy with a price spike brought on by severe output cuts.

Oil prices fell sharply on the lack of OPEC action, despite widespread indications that new cuts wouldn't be considered in Cairo.

At 1307 ET, Nymex crude oil futures for January delivery were $50.18 a barrel, down $4.25, or near 8%, after hitting a low of $49.52 a barrel.

Technical analysts at Barclays Capital in London said that with oil prices well below important resistance areas in the $56-$61 area, there would be "every incentive to assume that the trend would continue beyond the recent low at $48.25" and test the next technical support level near $39.20 a barrel. That level hasn't been seen since July 2004, when prices moved above $40 a barrel and began the heady ascent to near $150 a barrel in July.
Prices Aim for High $30s  

Barclays said "a cyclical bear trend has begun pointing to push toward the high $30s in the months ahead."

That suggests near-term prices closer to $35 a barrel than to $75. The Nymex futures market doesn't price crude at near $75 a barrel until the springtime of 2011.

The Oran talks could prove strained as OPEC's price hawks and moderates are increasingly at odds. Still the extent of any output reduction will depend on where prices are in the days prior to the talks.

OPEC President Chakib Khelil warned that if the group didn't cut output, oil inventories in the major industrialized countries could rise to 59 days, a level last seen in the 1998 third quarter, when prices averaged around $14 a barrel on their way to a record low monthly average of $11.31 a barrel in December 1998, amid the Asian economic crisis.

Commercial oil inventories held by the major industrialized countries in the Organization for Economic Cooperation and Development stood at 56 days in October, according to the International Energy Agency. Naimi said OPEC hopes to get winter stocks down to a 52-53 days of cover, in line with a year ago, which suggests a further tightening of supplies as demand falters.

As OPEC grapples with rising inventories, the historical price trend shows the group would have a difficult task in lifting prices in December or January.

In the 25-year history of Nymex crude oil futures trading, December and January share the distinction of posting the lowest monthly average price in eight years, the most of any month.

Copyright (c) 2008 Dow Jones & Company, Inc.


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