OPEC leaves pro­duc­tion quo­tas in place

Prices of crude oil have been sta­ble and within range car­tel fa­vors.

Austin American-Statesman - - BUSINESS - By Stan­ley Reed and Clif­ford Krauss The New York Times

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.

RON­ALD ZAK / AS­SO­CI­ATED PRESS

Oil min­is­ters of OPEC coun­tries meet Wed­nes­day at their head­quar­ters in Vi­enna. The car­tel’s report says that de­mand for OPEC oil will be 29.7 mil­lion bar­rels per day in 2013 — a roughly 1.3 mil­lion bar­rel per day de­cline from the present.

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