What price does OPEC want?

From the mid-1980s through the start of the current decade, OPEC adopted specific policies on pricing, informing the market of the crude oil price that it would look to achieve for the OPEC basket (see below) and using the quota system to try and maintain prices at around its targeted level. Initially, the organisation set a specific price as its objective with $18/bbl targeted between 1986 and 1991 before an increased $21/bbl was set as a target through the balance of the 1990s. Often poor discipline amongst its members and erosion of its market share meant, however, that the crude oil price invariably traded below its target such that, from 1999, a new approach was adopted – that of maintaining the price within a $22- 28/bbl target band.

This policy proved far more successful and the target band has never officially been revised. More recently, however, it is only too apparent that OPEC’s price intentions have changed and dramatically. The introduction of production restrictions in 2004 in defense of a $40/bbl oil price floor and again in late in 2006, at which time the OPEC basket was trading at around $55/bbl argue that OPEC’s expectations are now far higher. Quite what those expectations are is, however, unclear with the organization seemingly now trying to obtain a maximum price for its oil but, at the same time, not allowing the price to run so high that it significantly curtails global oil demand and economic growth. For the all important Saudis, we believe the maintenance of healthy political relations with the west is also an evident influence.

The OPEC basket

The OPEC basket comprises a mix of 12 different blends of crude produced by the member countries. In determining the price band for crude oil that OPEC wishes to see in world markets it is this basket that is key. As of September 2007 the basket comprised Saharan Blend (Algeria), Girassol (Angola), Minas (Indonesia), Iran Heavy, Basra Light (Iraq), Kuwait Export, Es Sider (Libya), Bonny Light (Nigeria), Qatar Marine, Arab Light (Saudi Arabia), Murban (UAE) and BCF 17 (Venezuela). Note that with the OPEC basket both heavier and more sour than WTI it trades at a typical 5-10% discount.

What is the western IOCs’ exposure to OPEC?

For the IOCs, decisions by OPEC to introduce production restrictions or to manage the pace of capacity growth clearly hold potential implication. For those companies that derive a significant proportion of their oil production in OPEC territories, volumes at a time when restrictions are being implemented will almost certainly be reduced. With this in mind, in the table below we detail our estimates of the companies oil production by OPEC territory together with the percentage of total oil production and hydrocarbon production that is OPEC sourced. What is evident from this is that even today, OPEC territories remain a very important source of IOC barrels most particularly at Total, Chevron, ENI and Exxon although, with the profitability per OPEC barrel tending to be much lower than that elsewhere, the significance of this production to upstream profits is likely to be far lower than the volume percentage may indicate. 

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