Analysis - OPEC unlikely to act until oil falls further
LONDON (Reuters) - Oil prices would have to drop below $90 to spur OPEC into decisive action to cut output and shore up a market that has already shed around $20 from this year's high.
The events of the Arab Spring have helped to drive up OPEC's budget-balancing needs to an estimated $100 a barrel, compared with above $109 for Brent crude Friday.
At the same time, a rise in other commodities has helped to raise the cost of extracting the most expensive crude -- a level often considered as a possible market floor -- to roughly $90.
For oil companies and producer companies alike, the pain of any fall below that level is cushioned by piles of cash following a price rally last year and in the first half of this year.
"I don't expect any knee-jerk reaction from OPEC," said Chris Weafer, chief strategist at Uralsib in Moscow. "I would only expect any action if the price goes below $90."
Brent Friday recovered from a 10 percent sell-off this week, triggered by fears about the fragility of the global economy.
The annual average price is above $110, up from just above $80 last year but below the year's high of $127.02.
Ultimately, OPEC's price requirements and marginal costs for the most expensive oil, such as Arctic oil or Canadian oil sands, are expected to provide support.
"Long-term oil prices remain well underpinned at $85-$90 a barrel by the marginal cost of oil and the Saudi budget," Bernstein Research wrote in a note.
But no-one is ruling out further short-term selling as economic weakness raises the possibility of a slump in demand and a sharp reduction in speculative positions on oil markets, which reached record levels earlier this year.
"The marginal cost has gone up since 2008. It's a good backstop longer term, but it doesn't mean anything in the short term," said Will Riley, co-manager at the Guinness Energy Fund.
He pegged the marginal cost at $80-$90 and predicted an oil price correction for both Brent and U.S. crude to the $80-$100 range.
The 2010 price levels already were enough to deliver healthy returns to OPEC members, according to statistics from the Organisation of the Petroleum Exporting Countries.
Richard Batty of Standard Life Investments drew a contrast between the 48 percent gain in GDP across OPEC countries between 2006 and 2010 and the economies of consumer countries.
"For oil importing nations such as the U.S., GDP was up just 9 percent over the same period, reflecting the effects of the recent financial crisis and recession along with the negative terms of trade effects of importing good and services, most notably oil," said Batty.
More than ever OPEC needs its petrodollars as governments, including leading OPEC exporter Saudi Arabia, have allocated billions in social spending to try to contain popular unrest.
Weafer and other analysts have argued that Saudi Arabia needs around $100 a barrel to balance its budget. The kingdom does not issue figures, but $100 could be around double its needs in 2008 when the oil price last crashed.
The late 2008 crash prompted Saudi Arabia to name $75 as the fair price for oil -- acceptable for producers needing to invest in new supply and not so high as to damage consumer country economies and depress demand.
It has yet to make public its equivalent figure now.
But at a June OPEC meeting that collapsed in chaos as Saudi Arabia failed to push through a proposed output increase, Oil Minister Ali al-Naimi said the $70-$80 fair range was a thing of the past.
Back in 2008, it took a market slump all the way down to less than $40 for OPEC to pull together and implement record output cuts.
(Additional reporting by Claire Milhench, editing by Jane Baird)
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