Oil Prices Drop Following OPEC's Demand Warning

Oil prices dropped sharply Friday, with New York's benchmark heading below the $100 line, wiping out gains earlier made earlier in the week after OPEC resisted raising output quotas.

WTI light sweet crude for July delivery fell $2.64 in New York trade to $99.29 a barrel. In London, the Brent North Sea contract for July lost 79 cents to $118.78. The market was still trying to read the future from this week's apparently confrontational meeting of the Organization of Petroleum Exporting Countries, where a Saudi push for higher production to moderate price increase was rebuffed by Iran and its allies. The first reaction of the market was that supplies would tighten and prices immediately pushed up. But prices retreated heading into the weekend following OPEC's demand warning Friday. "Should higher international oil prices persist, then this might ... put more weight on the downward risk" to global oil demand, by stagnated economic growth. "This risk might be translated into a reduction of current growth by 200,000 barrels per day (bpd)," OPEC said in its latest monthly oil market report. 'Short Period of Hibernation' for OPEC? The market was debating whether the cartel, which controls about 40% of global ouput, was likely to hold together around its 24.84 million barrels-per-day (bpd) target, or whether discipline would break down and individual countries break their quotas, especially oil powerhouse Saudi Arabia. "Some say that OPEC will collapse but we think it is more likely that they will be in a short period of hibernation," said James Williams of WTRG Economics. "If prices are high enough for long enough, the U.S. could enter another recession. If that happens, oil prices will collapse. It will be much easier for the Iranians to sit at the same table with the Saudis in a low price environment." "OPEC is not in a crisis and the failure of the cartel to reach a decision on quota is not inherently bullish in that Saudi oil will almost certainly still be forthcoming," said Robert Johnston of the Eurasia group. "Saudi Arabia is already signaling in the aftermath of the Vienna meeting that it will continue on that track with increases, provided that a still-weak U.S. demand picture starts to improve." OPEC also said in Friday's report that it expected global oil demand to increase by 1.6% to 88.14 million bpd in 2011, slightly lower than its previous forecast. However, it added, "A volatile oil market is making future oil demand estimates hard to manage." Copyright Agence France-Presse, 2011