It’s a good time to buy a barrel of oil. Prices have dropped precipitously in recent weeks for a host of reasons, including slackening demand in Europe and Asia and a gush of new production from North America (thank you shale) and Libya. But low oil prices pose a threat to the world’s petrostates, which rely on the sales of crude to keep their governments afloat. The specific price these nations require—called the breakeven price—varies, but rest assured that OPEC is not anxious to see oil lapse into a bear market.The cartel’s usual play in these situations is to constrict supply. Saudi Arabia, the largest OPEC producer, typically leads these cuts in production, but thus far hasn’t done so—rather, it has discounted the price at which it sells its crude to Asia. While it’s difficult to say why, exactly, Saudi Arabia hasn’t reduced production, analysts believe it has to do with intra-cartel posturing ahead of a November meeting. The FT reports:
“[The Saudis] are making a statement by cutting prices. Market share is more important than the price of Brent right now. If prices fall too low, they may decide to cut, but it is not yet a panic moment” [said Laura El-Katiri, a research fellow at the Oxford Institute for Energy Studies]. “This is a commercial decision they are making.”
But, as Bloomberg reports, some still expect Saudi Arabia to resume its traditional role as the cartel’s chief crude curtailer soon, in order to stave off further price drops:
“I don’t think there’s any rush on the Saudis’ side to bring the market lower” when disappointing demand could do that anyway, Francisco Blanch, head of commodities research at Bank of America Corp., said by phone from New York on Oct. 7. “…Saudi Arabia will cut if needed.”
In the meantime, the Saudis get to keep up pressure on Iran, which has a much higher breakeven price. Next month’s OPEC meeting will attract plenty of global attention—the price of oil is that important—so stay tuned.