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British company not believes in increasing oil prices to level, desired by OPEC

Oil&Gas Materials 30 May 2009 12:23 (UTC +04:00)

Azerbaijan, Baku, May 30 / Trend , A.Badalova/

OPEC's informal target of $75-80 per barrel (pb) might be a reasonable starting point for an assumption about the medium-term outlook for oil prices, but it is certainly not the last word, analysts of the British Capital Economics consulting company on economic research believe. They said that the balance of risks - even at current lower levels of $60-65pb - still lies on the downside.

The OPEC countries repeatedly stated that oil prices at lower than $70 per barrel is inadmissible.

"Of course, the ambitions of OPEC cannot be ignored," Senior International Economist of Capital Economics Julian Jessop said.

"The cartel accounts for around 40% of global oil supply and is dominated by the world's key marginal producer, namely Saudi Arabia. Nonetheless, there are several reasons for skepticism," Jessop wrote to Trend in an email.

For a start, the new price target is little more than an aspiration

based on the cartel's assessment of the highest sustainable price consistent with its latest judgment on the prospects for supply and demand.

Another reason is the impact of exchange rate dynamics on the prices. "Oil producers with bills to pay in other currencies like euro or sterling will require a higher price in dollars when, as now, the US currency has been falling," Jessop said.

Finally, the effectiveness of any price target depends on the readiness of members to comply with the rules, he said. "This might require them, in particular, to reduce their own output to offset any increase in non-OPEC supply (another important downside risk to prices)," he added.

The Gulf producers, notably Saudi Arabia, can afford to stick closely to their quotas. But others find it harder to resist the temptation to produce more than the agreed levels, especially when, as now, their economies are in deep recession.

Without a credible enforcement mechanism any price target has to be viewed with skepticism, Jessop said.

In 2008, OPEC twice decided to cut oil production at a general amount of 4.2 million barrels per day. However, in April, despite the announced reduction, OPEC's oil production was 25.81 million barrels per day which is by 965,000 barrels per day hits the set quota. The OPEC meeting decided to remain the oil production level unchanged on May 28.

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