“Stability, stability, stability,” Secretary General Abdalla El-Badri said at the opening session of the 5th Opec International Seminar, though there is a difference between this admirable goal and the impasse which looks to be the most likely outcome of the meeting of OPEC producers tomorrow.
Saudi Arabia has led a production increase which has gone further than merely replacing lost Iranian production to 31.58 million barrels according to OPEC’s June Oil Market Report.
The familiar division between the ‘hawks’ – Iran, Venezuela, Ecuador, Algeria and, for now, Iraq – against the ‘doves’ – GCC producers led by Saudi Arabia – has already emerged. Rafael Ramirez, Venezuela’s representative, says that OPEC countries are producing 3 million bpd too much. Algeria’s Yousef Yousfi is “worried about the deterioration of the market.” Wilson Pastor, Ecuador’s representative, wants to see production cut to meet the quota target. Iran has branded gulf producers “violators” of the OPEC quota.
Iran looks also to have been inflating its production figures, reporting to OPEC May production of 3.8 million bpd when secondary sources indication actual production of 3.2 million bpd.
With oil prices of $128 a barrel running into a wall of oil from Saudi and significant continuing downward pressure on prices, hawks may have a point. Surplus supply, says Iraqi Oil Minister Abdul Kareem Al-Luiabi, is “tremendous.” Improved US stocks and debottlenecking at Cushing has seen resurgent US crude production add to the glut.
Yet Saudi Arabia wants to see a quota rise – a paper exercise which would not actually see any more oil production – to 30.7 million bpd, a sign that the Kingdom took the potential for demand destruction from the recent price spike very seriously, and is primarily focused on maintaining a healthy steady long-term increase over realising the highest possible prices in the short-term.
At 30.7 million bpd, Saudi would communicate its demand-bolstering priority to markets, while leaving room to gently pare back its production further in response to slowdowns in emerging markets and further gloom in the Eurozone. Saudi’s policy is broadly supported by fellow gulf producers the UAE and Kuwait, whose supplies to growing Asian markets have increased recently.
Speaking at the OPEC International Seminar this morning, Saudi Oil Minister Ali Naimi was at pains to conclude that beyond immediate crises, oil demand will increase. “Long-term, living standards are rising, so long-term, demand for oil and gas will rise,” he said.
“Fossil fuels are here to stay for a long time,” Naimi added, advocating “the use of fuel efficiency” as the primary means of managing oil demand.
Arguably, Iraq is already getting caught in the middle of the two groups. With a tight fiscal balance, the country has an interest in seeing oil prices remain at over $100 a barrel. Yet Iraq has already overtaken Iran in exports, and its central economic ambition is to rise to Saudi Arabian-level production capacity, which is only possible with the proceeds of higher production levels. Both Saudi Arabia and Iran have their reasons to see Iraq’s production held down.
The country’s awkward position in the cartel may be enough to see eminent technocrat Thamer al-Ghadban sidelined for the Secretary-General job, to be decided tomorrow, in favour of Pastor.
The saying goes that you can tell a good compromise is struck when no-one is happy. With such divergent national priorities and visions of the oil market, expect just such a compromise tomorrow, with the OPEC production target likely to be unchanged. OPEC has seldom failed to cut its quota in the face of such a steep price decline. If it fails to do so, some will question what model of stability it is offering.
