Jan. 13, 2006
A crucial influence on the price of crude this year will be one that all but lacked pricing significance last year.

Bob Tippee

A crucial influence on the price of crude this year will be one that all but lacked pricing significance last year. The oil revenues of key members of the Organization of Petroleum Exporting Countries have reemerged as a factor in price forecasts.

According to the US Energy Information Administration, strong prices pushed up OPEC net oil export revenues by 43% in 2005 to an estimated $473 billion. EIA projects a 10% increase this year.

OPEC revenues, in concert with budget needs, affect quota and production decisions and therefore crude prices.

Last year, those decisions were easy. Because the market absorbed all available crude, welcoming supply with elevated prices, most OPEC members produced at or near capacity rates. Saudi Arabia, the exception, tries to maintain a cushion of spare capacity.

This year will be more difficult. A slowdown in demand growth last year, an expected recovery in non-OPEC supply this year, and steady growth in OPEC production of NGL, which isn't subject to the group's quotas, will lower requirements for OPEC crude.

OPEC thus will find itself once again needing to apportion production cuts.

In its November-December Global Oil Report, the Centre for Global Energy Studies assessed the challenge in relation to revenues and budget needs.

CGES expects OPEC to have to cut output by at least 1 million b/d early in the year. Because its fellow members other than Kuwait aren't likely to help, Saudi Arabia will have to cut 1.3 million b/d.

After a budget surplus of $65 billion in 2005, CGES says, Saudi Arabia budgeted for a $15 billion surplus this year, assuming a $35/bbl price of the OPEC basket of crudes and output of 9.5 million b/d. Achieving the target surplus with production reduced by the needed amount requires a crude price of $44/bbl. CGES thinks the lower OPEC production would keep the price at $48/bbl, so Saudi Arabia should find the cuts fiscally painless.

Furthermore, CGES puts the required OPEC cut for all of 2006 at 700,000 b/d, yielding a price of $50/bbl and a Saudi surplus exceeding $40 billion.

Sometimes, production sacrifice doesn't mean hardship.

(Online Jan. 13, 2006; author's e-mail: [email protected])