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OPEC Rolls Over Output Target Amid Mounting Economic Gloom

OPEC ministers, meeting in Vienna on 13-14 June, maintained their 30mn b/d output ceiling. The decision, widely expected, comes as OPEC heads into a third quarter riven with uncertainties over the health of the global economy and the potential impact of looming sanctions on Iranian supply. Rafiq Latta and Nader Itayim report from Vienna.

What was a fairly uncontentious decision masks some deep divisions within the organization. All members were clear on the threat the Eurozone crisis poses to oil demand, and prices. But there was an equally clear divide on how to tackle it. “We have to build a commitment to defend the price,” argued Venezuelan Oil Minister Rafael Ramirez. “The problem is when there is downward pressure it is not easy to control. We have a situation like 2008, when prices went to $35/B.” Venezuela was part of a group of hawks, which included Iran, Algeria, and Libya.

For some in the GCC the recent price drop – OPEC Basket prices have been below $100/B since end-May – has some virtues. The global economic situation is critical and lower prices can “give some sort of a stimulus in these difficult times,” argues a Gulf source. “We are thinking about the global economy. What would happen if Europe disintegrated and the oil market collapsed? We know at that time, the hawks, who are calling for cuts, would not cut, to stabilize the market,” he says. So far moderation does not come at a price. The weak euro has boosted OPEC members’ purchasing power given that their key export is denominated in dollars, cushioning the impact of lower oil prices.

The meeting’s official communiqué said members “should adhere to the production ceiling of 30mn b/d.” And OPEC Secretary-General ʹAbd Allah al-Badri stressed over-producers had “been asked to reduce” the 1.6mn b/d that OPEC’s latest Monthly Oil Market Report indicates they are producing above the 30mn b/d target.

However the communiqué also pledged member countries’ “readiness to swiftly respond to developments that might place oil market stability in jeopardy,” potentially allowing Saudi Arabia and its Gulf Arab allies to continue to adjust output to balance the market. While Mr Ramirez estimated overproduction at 2.8mn b/d and argued GCC countries were largely responsible, Saudi Oil Minister Ali Naimi said the kingdom was merely responding to customer demand. “When customers come, what do you do? They say ‘we want oil’, what do you do? You give it to them,” he argued.

Opposition to high output on the part of OPEC hawks is not solely down to its impact on prices. The current output ceiling has no individual quotas and the hawks, all of which are operating at full capacity, fear that higher production from GCC members will be used to argue for a higher share of quotas when the time comes to set them, argues the Gulf source. “They don’t want higher production, only because they cannot do it,” he said. Inter-OPEC tensions scotched the prospect, always dim, of any discussion on individual quotas.

These tensions also prompted a decision on a new secretary-general to be deferred until the group next meets. There are currently four official candidates – former oil minister Thamir Ghadban for Iraq, Riyadh’s former OPEC governor Majid al-Munif for Saudi Arabia, former minister Gholamhossein Nozari for Iran, and current Ecuadorean oil minister Wilson Pastor-Morris for Quito. The next scheduled meeting is due to take place in Vienna on 12 December, but such are the nerves over a sudden further downward jolt to prices that expectations OPEC might need to call an extraordinary meeting before December are high.

Specter Of Sanctions

Even more than at OPEC’s last meeting in December, Iran’s clash with the international community over its nuclear program cast a pall over events. Additional sanctions are set to be imposed on Tehran from end-June (see page 23), but the US decision on 11 June to give a 180-day waiver for key Iran crude customers South Korea, Turkey, Malaysia, India and Taiwan has reduced, albeit temporarily, significant pressure on Tehran. This move was likely done to reciprocate a more conciliatory tone from Tehran recently. As in December, Iranian Petroleum Minister Rostam Qasemi held a bilateral meeting with his Saudi counterpart.

OPEC’s official position is that it is against the sanctions, but a proposal by Iran’s traditional ally Venezuela that the organization’s dialogue with the EU – one of the instigators of the latest moves against Tehran – be reviewed is thought not to have been discussed at the meeting. At the OPEC seminar, bringing together producers, consumers and international oil companies, both Europe and Iran (in the latter’s case to an extreme degree) played down the impact of the sanctions.

“We have confidence in our partners, take Saudi Arabia, take Russia. And they are really flexible, as they have been in the last months,” argued EU Energy Commissioner Gunther Oettinger. “We have a huge storage capacity. We can increase it when we have to,” he continued. While conceding that whatever the storage capacity, prices would rise in the event of any serious disruption to Iranian supply, Mr Oettinger argued a weaker economic situation would mean there was less demand for Iranian crude anyhow.

Mr Qasemi conceded Iran might suffer some problems as a result of sanctions, but that it would be “those in Europe who will bear the greatest burden.” In fact sanctions had brought Iran benefits, he claimed. “They put sanctions on our oil industry. We were until two years ago net importers of gasoline and gasoil; yet today, we are exporters of these products. This is the result of the sanctions.” Additionally, sanctions had helped spur the development of the Iranian oil services sector, Mr Qasemi added.

Common Ground

One thing that is increasingly apparent is that members’ price targets have shot up in the last few years. While Venezuela  and  Iran  argued  for $100-120/B as a fair price and Angola $100-110/B, even Saudi Arabia

believes a long term price of $100/B is appropriate. These levels are required to unleash the investment needed to meet demand, argued Mr Badri. He stressed there was no doubt OPEC could meet this demand. To 2016 OPEC countries have 116 upstream oil projects on their books, amounting to 7mn b/d of new capacity, and requiring an estimated investment of $280bn should all the projects be realized, Mr Badri said.

If past experience is anything to go by a considerable proportion of these projects will be delayed. But there are plans for significant additions from Iraq, Libya, the UAE and Nigeria. Saudi Arabia will nevertheless maintain its dominant role in the organization as the world’s ‘central banker’ for oil. The last two-three months in which OPEC “managed to bring down prices from $128/B to under $100/B,” underlines the kingdom’s achievements, argues a Saudi source. “This is done by Saudi Arabia alone. This is undeniable.” MEES data shows the kingdom has produced over 9.5mn b/d since last July, averaging 9.77mn b/d the last 11 months, compared to 8.8mn b/d for the previous 11-month period.

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

*  Revised.

† Includes 50% share of Neutral Zone output.

© Copyright MEES 2012.