OPEC Chief: Oil Prices Aren't Coming Down In 2011

abdullah al badri tbi

Expect oil prices to stay where they are – on a record run above $100 per barrel in London – through the rest of this year.

That’s what OPEC’s Secretary General told us in Dubai.

In an interview with Bloomberg Television he said today’s high prices were surprising, given the dark clouds over global growth – the US/EU debt crisis and a risk of recession in gas guzzling markets.

Abdalla El Badri said that what’s keeping prices so high, with ‘no end to volatility,’ is the way it’s being traded. It’s a classic OPEC argument: that traders are to blame, that having oil as an asset class invites speculators.

He said if the US and Europe want a lower and more stable oil price, they need to reign them in.

“There is a disconnect between the fundamentals and the paper market. And it is the paper market that determines the prices,” said El Badri. “Excessive speculation, this is why prices are so high. The US and
Europe need to regulate.”

El Badri still sees a $16-20 risk premium in the price of Brent crude, owing to the ‘Arab Spring.’ It’s held since the uprising in Libya, which cut output and spiked prices, and hasn’t come down with the end of the fight. 

El Badri sees plenty of oil coming out of Libya – 1 million barrels per day within 6 months – and ruled out concerns that violence would derail the ramp up.

“I think the NTC now is capable of protecting the oil installations,” said El Badri. “The people controlling the oil industry right now they are very capable.”

El Badri himself is a former Libyan oil minister from the Qaddafi era, so analysts are especially keen on his assessment. Libya’s 1.6 million barrels per day were cut to a trickle during six months of revolution. As it returns to market, El Badri says producers like Saudi Arabia and Kuwait would cut back (at present Saudi is believed to be pumping at record levels to make up for Libya’s loss).

Net effect:  OPEC supply would remain steady.

I asked El Badri not just about oil prices, but about oil pricing – the record divergence between brent crude, traded in London, and WTI, traded in New York. They represent roughly the same grade of oil and historically used to trade around the same price.

This month there’s a more than $20 dollar gap, leading more producers to use the Brent price as a benchmark and propelling an argument that WTI is no longer relevant.

“The [price] gap is just too much,” said EL Badri. “I think this should be an issue taken a look at, examined carefully.”

The divergence complicates life for energy producers – especially those in North America, where they tend to use the lower WTI price as the benchmark. Unfortunately for consumers the lower US price isn’t felt at the pump – analysts say it’s refineries that benefit, scooping up the margins and marking up the retail price.

Another notable point from El Badri: Iraq, which has been ramping up production with the likes of Exxon and BP, could be subject to OPEC quotas by the end of 2012. To date they’ve been exempt from quotas,
with no timeline to change that. Per energy analyst Robin Mills, El Badri’s comments imply 2.5-3 million barrels per day from Iraq by the end of next year – setting conditions for an oil surplus, outright
oversupply on the market. That’s especially likely if global economic conditions turn as bad as feared.

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