OPEC Set To Meet Amid Falling Prices

Falling prices and extreme uncertainty over demand pose some difficult choices for OPEC ministers at their 13-14 June seminar and meeting in Vienna. High stocks, ample supply and weakening sentiment on demand trajectory as a result of concerns over the global economy conspired to push the OPEC Basket price below the $100/B mark for the first time since October last year (the last time they were below this level for any sustained period was February 2011). Rafiq Latta writes.

Rising OPEC production has been a key factor in first smothering and then bringing down OPEC Basket price levels, which back in March were threatening to break through the $125/B mark. Average OPEC wellhead output of 31.63mn b/d for the first five months of this year was some 2.25mn b/d above the same period in 2011, according to MEES calculations (see table on page 3). Meanwhile, estimated demand for OPEC crude for the first half of 2012 of 29.25mn b/d, according to OPEC’s May Monthly Oil Market Report (MOMR ), was actually down on the 29.4mn b/d ‘call on OPEC’ for same period in 2011.

Demand will be the key ministerial concern in Vienna. And growing fears of a potential second half of the year demand rout could potentially overturn pre-meeting expectations for a low-key outcome on 14 June. “Everything was pointing to the fact that nothing will be done,” notes Paul Tossetti of consultants PFC Energy. “But now with prices coming off so quickly, they could still do something,” he argues. The May MOMR showed demand increasing by less than 900,000 b/d this year and only 30,000 b/d from the second to third quarter. This compares to 1.3mn b/d and 600,000 b/d for the same figures on last July’s MOMR report, the first to show projections for 2012.

Oil and finance ministers of OPEC kingpin Saudi Arabia have both gone on record in recent weeks saying $100/B is a fair price for oil. Given bumper revenues of recent months, a period at $90-100/B should not in itself be enough to prompt any Saudi push for serious output restraint. Riyadh of late has shown a strong aversion to public comment on collective OPEC supply action, instead preferring to quietly adjust its own production to ‘balance the market’. But any further sharp price falls ahead of the meeting and/or any fresh indication of weakening demand could bring the Saudis round to the idea of taking more assertive action. Any demand or projected ‘call on OPEC’ revisions revealed in the June edition of the MOMR , set for publication on 12 June, could catalyze such a Saudi change.

OPEC hawks have already been calling for tighter supply. “I hope we find a consensus to correct the situation if it turns out that the ceiling of 30mn b/d was exceeded. If it is not we will continue to face the price deterioration that we have suffered from these last days,” Algerian Minister of Energy and Mines Yousef Yousfi told the Algerian official news agency on 7 June. “It is in nobody’s interest to see prices fall,” he added. Iranian press agencies report Tehran and Baghdad agreeing “a common stance” to push for “a return to quotas.” Aside from the fact both Iran and Iraq are price hawks, the reports owe more to regional politics than OPEC reality. Iraq is not part of OPEC’s quota system, and until it rejoins it, its view will not carry any weight in output discussions. While an overall OPEC target of 30mn b/d was agreed last December, individual quotas have not been in force since last June’s meeting ended in disarray (MEES, 13 June 2011). 

Four Horse Race For Top Job

Iran and Ecuador have joined Saudi Arabia and Iraq in proposing candidates for a new OPEC Secretary-General. Former Iranian oil minister Gholamhossein Nozari is Tehran’s candidate. Quito is proposing current oil minister Wilson Pastor-Morris. Thamir Ghadhban, head of the Iraqi Prime Minister’s Advisory Commission, and a former oil minister, is Iraq’s candidate, while Riyadh is proposing Majid al-Munif, its OPEC governor. The winner will replace 'Abd Allah al-Badri, whose term ends at the end of 2012.

The selection of OPEC secretary-generals is traditionally a fraught task, typically with unexpected compromise candidates eventually being selected. Inter-OPEC tensions have meant that, for all their clout both within the organization and world oil markets, Iran and Saudi Arabia have only held the secretary-general position once each – Tehran in 1961-64 and Riyadh in 1967. The dispute over Iran’s nuclear program and Arab Spring turmoil mean this year’s selection is certainly not going to be any more tranquil than past elections. 

OPEC output looks to have eased off somewhat in May in response to weakening prices (see page 3). Middle East sailings of around 17.75mn b/d in mid-May were some 500,000 b/d down on highs a month earlier, according to tanker tracker Oil Movements , although this is likely partly due to the summer uptick in Gulf oil demand. The shipping data also shows Middle East Gulf sailings (even taking into account recent slippage) at their highest levels for three years and this in the context of rising regional demand, estimated at anywhere from 200,000 b/d to 400,000 b/d per annum in the past couple of years.

Strong output gains from Saudi Arabia, Iraq and Libya over the past six months have more than compensated for sanctions-induced falls from Iran (200,000-250,000 b/d) and outages in non-OPEC Sudan, Syria and Yemen (around 500,000 b/d). Sanctions have led to a sharp decline in Iranian exports in recent months. But a strong build-up of Iranian inventories, both onshore and in tankers, currently estimated at over 60mn barrels, has mitigated the impact on MEES production estimates, which are higher than some rival secondary sources. 

New data, showing lower Iraqi domestic refinery throughputs, prompted a downward revision to MEES estimates on Iraqi output going back to the beginning of the year. Aging Iraqi export infrastructure that is already  buckling  under  the  strain of new output will likely limit any fresh export surge to nearer year-end,

but output still managed to hit 3mn b/d for the second consecutive month. Algerian output too was reassessed. Sustainable capacity at the key Algerian workhorse field, 300,000-350,000 b/d Hassi Messaoud, has come under increasing pressure over the past couple of years.

OPEC Crude Oil Production May 2011 – May 2012 (MEES Estimates – ‘000 B/D)

*  Revised.

† Includes 50% share of Neutral Zone output.

© Copyright MEES 2012.