The cartel’s latest meeting ended in disarray. Future agreement between members is unlikely. The gulf states are going it alone. The gap between supply and demand is closing. Can OPEC work? Will it? Who needs it?
On 8 June, the 159th meeting of the Organization of the Petroleum Exporting Countries (OPEC) unexpectedly disbanded an hour early, with delegates unable to agree on whether to increase production targets for the next six months.
OPEC is due to reconvene on 14 December, with OPEC Secretary General Abdullah El-Badri abandoning hope of an interim meeting in three months’ time.
The news provoked dismay from analysts, consumer countries and markets. The International Energy Agency (IEA), the representative body for consumer countries, had identified “a clear, urgent need for additional supplies on a more competitive basis”, before the meeting, demanding an 3 million extra barrels per day (bpd).
The IEA’s remarks were issued in the context of increased volatility in oil markets, the need to compensate for production lost from Libya and Yemen, and a series of weak economic data suggesting high oil prices are sapping life from the global economy.
“Unfortunately we are unable to reach a consensus to reduce or raise production,” El-Badri told reporters. “OPEC is divided on the decision, not as an organisation,” El Badri said. “Yesterday, the problem was about figures. Is there a call on OPEC of 2 million barrels a day or not? Do we have 3.9 percent economic growth or not?
Uncertainty was the elephant in the room”.
El-Badri’s announcement, – afocusing on apparent technocratic differences,gave little clue as to just how spectacularly the cartel’s reputation for unity and stability has diminished as a result of the meeting. The question is now not merely whether OPEC can be effective as a deliberative body, but whether it is pushing itself into irrelevance. More tellingly, he was forced to deny to Platts that OPEC is now in crisis.
Disagreeing to disagree
The meeting was reported by Reuters to be acrimonious, with Saudi Oil Minister Ali Ibrahim al-Naimi branding it “one of the worst meetings we have ever had” when facing the press.
The Saudi delegation arrived in Vienna early to push for increased production of around 1.5 million bpd to a total of 30.3 million bpd and the official recognition of current over-quota production.
The UAE and Kuwait were supportive with Qatar’s energy minister, Mohammed Bin Saleh Al-Sada, said outright that he backed Saudi calls for an increase.
According to Reuters, non-Gulf delegates said Saudi Arabia had proposed an increase on top of April supplies that was too high for them to contemplate.
In the press conference following the meeting, a plainly exasperated al-Naimi broke with tradition to name Algeria, Angola, Ecuador, Iran, Libya and Venezuela as the delegations that had voted against an increase.
No one mentioned the position of Nigeria, the 12th member of the group.
As the Arab Spring rolls into summer, and popular opposition to ‘strongman’ rulers in the Middle East extends to and intensifies in Syria, Riyadh has been keen to promote stability in the region, and has moved into even closer partnership with the United States.
As a result, Saudi Arabia is keen to answer President Barack Obama’s call for more supply and disincentivise breakneck American offshore development following the expiry of Obama’s moratorium of exploration in the Gulf of Mexico, by stabilising oil prices under $90 per barrel.
Iran was the chief opponent of an increase, with oil minister Mohammad Aliabadi told the assembled press that the “world remains well-supplied with oil, with ample spare capacity and adequate stock levels”.
While Aliabadi’s words are technically true, with reserves standing at a sensible 55 days, undergirding his message were political tensions both within and without Iran and other OPEC states. Moreover, since 8 June the OPEC reserve is falling, putting renewed upward pressure on prices.
Asking the impossible
That Iran and Venezuela were among those to refuse to consider an output increase is perhaps unsurprising.
Saudi Arabia is the only country with the ready ability to increase production further, with most OPEC members being at or near maximum output, or limited by the need for further investment.
The upshot of the Saudi’s case to OPEC was that delegates outside the Gulf were effectively being asked to receive less money for producing the same amount of oil they do now, in order improve ailing recovery in advanced economies.
While Saudi Arabia has hoarded trillions of dollars in oil revenues over decades, other countries have spent oil money as quickly as they have earned it, making a $20 per barrel targeted reduction in the price of oil akin to voting to slashing their budgets.
The governments of Iran and Venezuela were always likely to find this unappealing, as they continue to make political hay by blaming their respective woes on the US, and are reliant on high oil revenue as their respective economies suffer under sanctions and mismanagement.
Libya
There was also a debacle within the debacle, regarding Libya. Omran Abukraa, the representative sent by the Gaddafi regime, after arriving three hours late to the meeting via a back stairwell to vote down the proposed increase.
Abukraa then admitted to Reuters that the country’s oil production has declined dramatically and “nobody is interested in buying Libyan oil. That’s the problem – how we produce oil and how we don’t sell it.”
Gaddafi’s regime, in addition to facing international sanctions, is actively opposed by other OPEC states. Kuwait and Qatar have given official recognition to the rebels. Qatar has goen further, providing military assistance to NATO and purchasing oil from thr rebels in the East.
It is difficult to see what business Abukraa had voting on behalf of a pariah government unable to produce or export oil.
El-Badri could only confirm that OPEC “did not discuss Libya’s situation,” according to Britain’s Financial Times.
Losing credibility
OPEC delegates and economists have consistently blamed speculators for high and volatile oil prices since 2008. The failed meeting also undermines OPEC’s credentials as a body promoting stability in global oil markets. Ironically, if speculation is a problem, OPEC has been making it worse.
Oil prices fell ahead of the meeting on the expectation of a quota increase, before leaping by more than $2 a barrel as the fallout of the meeting filtered through the newswires.
Other commodity prices also rose, which is anathema to Arab states concerned about regional and North African unrest.
Irrelevant?
Speaking after the meeting, Al-Naimi told Platts that Saudi Arabia will ignore OPEC quotas can supply “any amount of oil” and will produce “whatever the market needs”. “The market is not going to see a shortage because we did not reach agreement at this meeting,” Al-Naimi said.
The UAE and Qatar stood with Saudi, with Mohammed bin Dhaen al-Hamli, the oil minister for the United Arab Emirates, speaking of “tight” supplies before the meeting. Afterward he added, “If there is a need for more oil, we will supply more oil.”
The New York Times reports that Saudi aims to initially increase its exports from 9.3 to 10 million bpd, with much of the additional oil bound for China. Events in Libya and Yemen have reduced global oil production by 1.6 million bpd in 2011.
In reality, the OPEC quota system has been irrelevant to actual production levels for some time. Individual country quotas were ditched in 2007 and the OPEC-wide quota has been ignored by most OPEC countries – Saudi in particular – since then.
Current OPEC production is some 1.4 million bpd above the quota, and with al-Naimi’s pledge, the gap is set to widen considerably.
Platts revealed in their May oil production survey that Saudi increased production in the month before the June OPEC meeting by 200,000 bpd.
More dramatically, Reuters reported on 15 June that the USA and Saudi Arabia held abortive secret talks with a view agreeing a crude swap deal that would cut out OPEC, and the market, entirely.
Under the proposed deal, the US would provide European refiners with enough sweet light crude to stabilise the market from its strategic oil reserve, in exchange for a greater quantity of heavy Saudi crude below market rate.
All the above makes explicit that OPEC has always effectively been Saudi Arabia, due to the volume of its oil reserves and the Kingdom’s flexibility in deploying them.
More generally, global demand is heading for parity with supply. Only one-fifth of oil used last year was replaced with new supplies, according to BP’s 2011 Annual Statistical Review.Goldman Sachs has recently claimed Saudi’s extra production commitment will leave it with only 500,000 bpd further wriggle room.
OPEC’s share of global production is falling. At their zenith in 1973, OPEC producers accounted for 52% of total world oil supply. This has now fallen to 42%, with signs that this is likely to fall further.
According to BP, oil production outside OPEC grew by 860,000 bpd last year, or 1.8%, the largest increase since 2002.
Some analysts believe Russia, not Saudi Arabia, is already the marginal supplier to advanced economies. Jeff Rubin, former Chief Economist at CIBC World Markets, cites Russia’s Saudi-rivaling post-Soviet production high of 10.26 million bpd in May and says Russia is likely to export more for the foreseeable future with few signs of exploration abating.
Gas consumption grew 7.4% last year, against oil consumption growth of just 3.1%, according to BP. Oil lost market share for the 11th year running.
Whatever about the Saudi-led decision to ‘produce and be damned’; in such circumstances, what use is a producers’ cartel at all?
OPEC June Monthly Market Update
Highlights from OPEC’s latest digest of global oil markets in May:
– OPEC Reference Basket plunged by $8.15 or almost 7% in May to average around $110/b.
– OPEC’s world economic growth forecast for 2011 remains at 3.9%, though challenges to the forecast have become more pronounced. The US forecast remains unchanged at 2.6%. Japan’s forecast is revised down to -5% from -0.1%.
– Developing Asia, is still expected to contribute the most to global growth in 2011, with China growing by 9.0% and India by 8.1%.
– World oil demand is forecast to grow by 1.4 million bpd in 2011, following growth of 2.1 million bpd in the previous year.
– Non-OPEC supply is projected to increase by 700,000 bpd in 2011, following a minor upward revision from the last report.
OPEC also released their outlook for the second half of 2011.
The report is more bearish than OPEC statements earlier in the year, pointing both to persistent growth, jobs and fiscal weakness in OECD countries, while flagging the nascent danger of inflation and asset bubbles in emerging economies.
Chinese growth is still thought to balance underlying US weakness, with China’s use of diesel generators a factor.
On the supply side, the current forecast for non-OPEC production is much higher than was expected at the beginning of this year. The adjustment is supported by North America, Latin America, the FSU and China, with special mention given to the US’s increasing output of shale oil.
OPEC expects a tightening market as the gap between supply and demand narrows. As a result, global inventories could continue to decline as the market enters a period of high seasonal demand.
