Despite the short-lived rally above $60 last week, there are strong signs that OPEC members have limited appetite for further quota cuts or revisions, come the organisation’s May 28 meething, according to IHS Global Insight analyst, Catherine Hunter.
OPEC member states have consistently called for a $70 target price range, but in the face of continually weak fundamentals, it seems further cuts are no longer the favoured option, with only Iran advocating further supply side controls.
“The latest comments from OPEC members see Iran more or less alone in consistently advocating further quota reductions at the next OPEC meeting st the end of the month, with others, including Algeria, seeing non-compliance with current targets and fragile global economic recovery as persuasive forces for restraint,” explained Hunter.
“Unless oil prices start to move closer to the rhythm of rising inventories and retreating demand, rather than their current shadowing of positive financial market news, early signs are for a “hold” at OPEC’s next meeting, pushing back a decision on next steps to the group’s next scheduled meeting in September.”
Creeping non-compliance from OPEC members was showing itself as a problem in April, she said, adding that some members are already seeking special dispensation from the agreed quotas
“Angola’s has reportedly requested to have its ceiling waived, potentially increasing the burden on Gulf states to bear the brunt of restraint—albeit with more limited budgetary pressures than some members elsewhere,” said Hunter.
In the latest round of comments from influential OPEC players, Algeria’s Chakib Khelil has drawn back from his previous position supporting further cuts made in late April, instead stating that it would be “difficult” to lower the current ceiling of 24.85 million b/d for the OPEC-11, given the lack of compliance from “two or three members”. That position echoes sentiments expressed by the Gulf states (bar Saudi Arabia, which has yet to declare) who have also come out to tentatively support an oil price floor of around US$50/b, with the caveat that the OPEC standard of US$70–80/b is needed for long-term investment.
The latest figures from both the IEA and OPEC show Iran increasing output in April by 90,000-100,000 b/d to give a compliance level of under 30%.
“Indeed, that paltry attempt at compliance is likely to see Iran come in for some heavy criticism at the next meeting in Vienna (Austria), alongside current president of OPEC, Angola, which has reportedly applied for a “waiver” in its quota obligations due to the challenges of reining in capacity in a growing producer,” explained Hunter.
Angola’s compliance has also been below the 30% mark—with confusion evident from the start of the latest ceiling in January when it maintained its quota was 1.6 million b/d against the equitable share of cuts that would have left it with a 1.5-million-b/d target. Its current production is estimated at 1.7 million b/d, with potential capacity to increase to 2.1 million b/d after recent field expansions, in the unlikely event that it should choose to entirely throw solidarity to the winds.
Demand-Side Blues
“One potential fly in the ointment of current OPEC thinking would be if oil prices started to more closely shadow market fundamentals, which both the IEA and OPEC noted as “weak” and “far from balanced” in their latest monthly reports. As it is, oil prices have tracked the course of recovering global equity markets to hit levels of US$60/b in the last week, before falling back to the high US$50s/b—still well over the threshold identified by the Gulf ministers (and indeed under the average budgeted oil price for the OPEC-11, which lies in the low US$40s/b).”
Those fundamentals were highlighted by further downward revisions to both OPEC and IEA demand estimates in their latest reports. OPEC is now looking at demand of 84 million b/d in 2009 versus the IEA’s 83.2 million b/d, which translates into a 2.6-million-b/d drop year-on-year (y/y). It is quite remarkable that, at the end of 2008, figures for 2009 demand from both groups were in the range of 86-87 million b/d, giving an indication of how hard, fast, and unexpected the impact of the current downturn has been on oil prices.
Implications
“There is still plenty of time to run before the 28 May meeting, and the movement of oil prices over the weeks leading up to the meeting, as always, are providing some grounds for shifting opinion within the group. One particular danger highlighted by the April data is that OPEC members are tempted to further indiscipline by rising oil prices and complacency over the market repercussions of high stock levels, which are now equivalent to over 62 days forward cover in the OECD, compared to a preferred level expressed by OPEC ministers in late 2008 some 10 days short of that. If those stocks start to dominate market sentiment, the group could find itself in the awkward position of having to retrench for further action, potentially bringing to a head existing tensions over who is—and perhaps more pertinently, who is not—bearing the greatest price of restraint. Constant vigilance in this regard should be the OPEC ministers’ watchword.”
About the Author: Catherine Hunter is an analyst for IHS Global Insight, and independent forecasting and analysis provider. The company provides comprehensive economic, financial, and political coverage independently covering 200 countries and more than 170 industries and is ranked as one of the most consistently accurate forecasting companies in the world.
