OPEC leaves production quotas in place
Prices of crude oil have been stable and within range cartel favors.
Members of the Organization of Petroleum Exporting Countries left their 30 million barrel-perday quota for oil production intact Wednesday, a decision that indicates the cartel’s satisfaction with current crude prices and its reluctance to do anything to further weaken the world economy.
But even though it stuck with the status quo, the group, whose representatives are in Vienna for the meeting, may face serious tests in the near future, as rising production outside the cartel threatens its market share and influence in the world.
So far, OPEC has had an easy year. Crude prices have been stable and within the range the organization favors. Although U.S. oil prices have fallen into a $80- to $90-perbarrel range, the non-U.S. benchmark Brent crude remains well above $100 per barrel. The OPEC basket, which members considers representative of what they receive for their oil, was $104.80 per barrel Tuesday.
“At these prices no one wants to rock the boat,” said Bhushan Bahree, an OPEC analyst at IHS Cera, who was in Vienna for the meeting.
But the global oil market is going through major changes, led by the surge in U.S. oil production, which reached 6.5 million barrels per day in September, the highest since 1998 and a 900,000 barrels-perday increase from a year earlier, according to the U.S. Energy Information Administration.
Iraq, an OPEC member not subject to the organization’s quotas because the country is recovering from the ravages of war, is also rapidly increasing production and now is at levels last seen in the late 1990s.
OPEC is unlikely to escape being buffeted by these shifts.
“More production in the U.S. means there is less available for OPEC,” said Jamie Webster, an analyst for Washington- based consultants PFCEnergy, who was in Vienna observing the meeting.
The cartel’s 12 members — Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela — produce roughly one third of global oil output.
The high oil prices of recent years have led oil companies to invest heavily in exploration and in techniques to extract hydrocarbons that until recently were off limits, such as from the shale formations in North Dakota. As a result, supply is increasing faster than just about anyone expected, while demand remains sluggish thanks to the tepid world economy.
IHS Cera expects the global supply of oil from non-OPEC producers like the United States, Kazakhstan and Brazil to grow by 1.2 million barrels per day next year — well ahead of demand, which is only likely to increase by 800,000 barrels per day.
Should this prediction, which is similar to the cartel’s own forecast, prove on the mark, OPEC will need to trim its output, giving up market share. The signs are that it is already doing so. An OPEC report published Wednesday showed that Saudi Arabia, the key decision maker in the group, had already cut output by 200,000 barrels per day in November to 9.5 million barrels per day, the lowest since October 2011.
The cartel’s own report says that demand for OPEC oil will be 29.7 million barrels per day in 2013 — a roughly 1.3 mil- lion barrel per day decline from the present.
“If the world ends up with a lot more capacity to produce oil than appetite to consume it, then either OPEC countries have to figure out a way to cut back production or prices will crash,” said Michael Levi, an energy fellow at the Council on Foreign Relations. “Sometimes OPEC doesn’t make decisions, but individual countries do and then others follow.”
Abdalla Salem El-Badri, the OPEC secretary-general, acknowledged the possibility of production cuts in Vienna on Wednesday.
“Maybe in the coming months we will produce less,” he said.
Recently, OPEC members have not published specific quotas, but the whole organization was supposed to observe a 30 million barrel-per-day ceiling, which it is now exceeding by around 1 million barrels per day. This lack of specific targets allows the Saudis to try to keep the global system balanced by adjusting the amount of oil they sell without the need to haggle over changes.
But if prices look in danger of plummeting, they will ask their Gulf neighbors and the wider organization to help out, possibly threatening the organization’s cohesion.
“It could cause tension in OPEC if they had to cut back substantially to shore up prices; some of the pain might have to be shared,” said Bahree of IHS CERA.
At the meeting, OPEC ministers voted to retain El-Badri, a former Libyan oil official, as secretarygeneral for another year, partly because Iran and Saudi Arabia, longtime rivals for influence in the group, could not agree on a successor.
The rapid growth of Iraqi production may mean that OPEC needs to find even larger cuts. Iraq has already surpassed sanction-hampered Iran and become the second largest producer in the cartel and has plans to go much higher.
World economic performance is the key. Stronger economic growth would stoke demand for energy and help soak up substantial increases in supply, as happened when Russia increased its oil production by around 50 percent between 1998 and 2004.
On Wednesday, the International Energy Agency revised its demand forecasts for next year upward by 100,000 barrels per day, giving some comfort to OPEC.
But the IEA, an autonomous group that represents oil-consuming nations, wrote that it was facing a confused picture, with the European economy stagnant and China, the big source of demand growth in recent years, sending out mixed economic signals.
“Everywhere, uncertainty prevails, “the IEA wrote.