You can’t blame the Secretary-General of OPEC to be optimistic about the short- term prospects of oil. Obviously, he has to be optimistic because that is part of his job. OPEC is going through a tough time right now since there is internal pressure in the organization regarding the direction of oil prices. Behind its seemingly united facade, OPEC actually has two factions. One faction involves countries where oil extraction is very cheap and oil is plentiful. I am of course talking about Saudi Arabia and the United Arab Emirates. On the other side are countries with higher oil extraction costs like Iran, Venezuela and Nigeria. These countries don’t have much leeway when it comes to oil prices. Oil has to be priced fairly high for these countries to generate positive cash flows from their oil resources.
With oil hovering around the 50-dollar mark, this second group of OPEC countries are definitely feeling the pain. With this background, it’s perfectly understandable why the Secretary-General of OPEC, Abdullah al-Badri is optimistic about oil short- term prospects. He has to send out the right signals and telling the market that oil will rebound is sure to be music to the ears of higher-cost OPEC partners that are feeling quite a bit of domestic pressure as their revenues dwindle. Many of these countries have social welfare and social stabilization programs that are usually paid for by oil revenues. When those revenues dip, there is internal pressure.
Unfortunately, Mr al-Badri’s statement is probably not going to do much good for the price of oil due to the fact that oil now has a natural ceiling in the form of US shale oil production that the days of 100-dollar per barrel oil are probably gone permanently. As oil prices appreciate, all these shale oil and other alternative oil production sources reactivate which then work to drive the price of oil downward.