OPEC May Cut Supply to Hold Budgets at $99 Oil: Apicorp

OPEC will probably cut output if Brent prices keep trading below $100 a barrel because that’s less than what many member countries need to balance their budgets, an inter-governmental Arab energy lender said.

Oil prices must average $99 this year for the 12 members of the Organization of Petroleum Exporting Countries to be able to balance their national budgets, said Ali Aissaoui, a senior consultant at the Arab Petroleum Investments Corp., or Apicorp.

“OPEC will definitely need to cut production to shore up prices as they can’t produce at prices close to their break-even level,” he said today by phone from Khobar, Saudi Arabia, where the bank is based.

Saudi Arabia, OPEC’s largest producer, needs an average price of $94 to balance its budget, according to Apicorp estimates. Iran requires oil at $125 to break even, or almost double the level needed by Qatar, Aissaoui said. The break-even level represents the price sought by the government, not the actual cost of producing oil.

Brent crude for June settlement fell 95 cents to $98.96 a barrel on the London-based ICE Futures Europe exchange. The front-month contract fell below $100 yesterday for the first time since July. OPEC’s basket price, which represents the group’s export grades, has also fallen below $100.

Inventory Levels

“If Dated Brent slips further, this would shift the futures market from a long period of backwardation to a contango position, thereby encouraging the accumulation of inventories in the physical markets,” Aissaoui said today in a an e-mailed note. A contango and rapid accumulation of inventories would make it harder for OPEC to stabilize prices near member nations’ desired break-even levels, he said.

Saudi Oil Minister Ali al-Naimi said on March 18 in Hong Kong that Brent crude at about $100 is reasonable. Venezuela supports a price floor of $100, oil minister Rafael Ramirez told reporters in Caracas on April 15, adding that he thinks all OPEC countries agree with this price.

Al-Naimi said in his Hong Kong speech that Saudi Arabia is concerned about global economic growth, not about maintaining oil prices at any specific level. Any suggestion that the nation is trying to keep prices high to finance domestic spending is “not realistic,” he said then.

OPEC’s members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. The organization’s next ministerial conference will be held on May 31 in Vienna.

To contact the reporter on this story: Wael Mahdi in Manama at wmahdi@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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