Saudia Arabia's effort to have the Organization of Petroleum Exporting Countries (OPEC) increase production by 500,000 barrels by early next week may bring a "modest amount of price cooling" in the oil market, short-term, according to one oil trader.
Independent energy trader Jim Dietz told Bloggingstocks Monday that even though the Saudi's ability to move oil prices is not as strong as it was a generation ago, the nation still has "a strong voice in OPEC, and in OPEC's production," which helps determine the global price for oil. Oil fell $2.19 to $94.13 in mid-day trading Monday, as traders trimmed long positions ahead of an oil producer summit this weekend in Saudi Arabia.
"Clearly, the Saudis are not happy with oil flirting with $100 per barrel. I mean, who is? The Saudis fear a major slowdown in the global economy if oil stays this high or moves higher during 2008. And frankly, everyone in the oil market fears the same thing," Dietz said. "If they can persuade OPEC to increase production by 500,000 barrels, that amount, and some cheating, will help stabilize the market in the short-term."
Historically, OPEC members have displayed a tendency to 'cheat' slightly in reference to their quota -- meaning they tend to produce slightly more than their OPEC quota, which has the effect of increasing OPEC production above officially-set cartel targets.
Dietz said if OPEC-produced oil increases by 800,000 to 1 million barrels per day via an official increase and some 'cheating,' that would help stabilize prices, at least in the short-term. However, Dietz underscored that long-term, global demand will still be the most important factor determining oil's price.
"That's what's really driving this market is emerging market and developed world demand," Dietz said. "The other oil shocks in 1973-74, 1979, 1990 were supply-based, this one is demand-based, and longer-term the price of oil will moderate only when oil demand starts to slow."
Over the years, several OPEC officials have argued that OPEC has limited power regarding prices. The cartel, it says, strives to see that markets are well-supplied and that overall "price stability" exists, but that market forces, ultimately, determine oil's price. During oil's surge in 2007, OPEC officials have argued that geopolitical concerns, speculators, and oil processing and refinery bottlenecks, and not OPEC's production, are at the root of oil's more than 70% price rise.
Nevertheless, as producer of about 40% of the world's oil supply, OPEC's words -- and the production philosophy those words imply -- still have the power to move markets, as evidenced by Monday's 2% price drop.
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