Oil & Gas ME reports from OPEC in Vienna
OPEC Secretary General Abdalla El-Badri has followed yesterday’s decision by the cartel to maintain its 30 million barrels per day target with an expectation “everybody will respect” the target and an estimate that members of the cartel will begin paring down production from July.
In a press briefing at OPEC headquarters this morning, Badri acknowledged that the cartel is exceeding its own target by 1.6 million barrels a day (bpd), and that “the market is in need of 30 million bpd only.”
Badri said that oil prices of $100-110 a barrel “are not really a threat to economic growth,” and that OPEC “should really go back to 30 million [bpd].”
The 30 million bpd target was set in December, when OPEC’s secondary source data indicated cartel-wide production of 30.4 million bpd, said El-Badri.
WTI prices have dropped steeply since March, hovering today at around $85 a barrel, with the Brent benchmark a shade under $98.
When pressed on a timescale for member states to reign in surplus reduction, Badri said “maybe this will happen sometime in July.”
“Operationally, it is not easy to reduce production by 1.6 million barrels a day from now until the end of June,” he added. “The most important thing to me is the 30 million bpd…I would like to see at the end of the month, that the production does not exceed 30 million.”
Reports emerged yesterday that the ‘hawkish’ bloc of OPEC members – Iran, Algeria and Venezuela in particular – had faced off with Gulf producers about their production, which has elevated production to the point where even the UAE’s Oil Minister acknowledged the market is “well supplied, maybe a little bit oversupplied.” Hawk members are motivated by fiscal breakeven levels above those of Gulf producers of around $110 a barrel.
Iraq, too, raised concerns of oversupply, with Iraq’s governor to OPEC telling reporters yesterday he is not happy with oil below $100.
However, the country’s position is set to shift as it reconciles its need to balance the books on a huge government spending program with the need to increase production from rehabilitated fields. Quite how Iraq will elbow into OPEC’s targets is unclear, as is whom it will elbow out.
Whether member states, and Saudi Arabia in particular, actually reduce output from July is another matter. After intense lobbying from Western governments and an insistence from the IEA on Wednesday that the market is still not oversupplied, the Kingdom appears to be pursuing a long-term strategy of sacrificing optimum short-term prices for the retention of steady and rising oil demand. Saudi Arabia has been pumping crude at a 30-year high rate of just below 10 million bpd.
Only Saudi, with a current budget surplus of around 30% of GDP, a fiscal breakeven of around $80 a barrel and a declared production ceiling of 12.5 million bpd, enjoys the ability to both hike and reduce production to a sufficient degree to move prices. Oil Minister Ali Al-Naimi indicated a preference for a raised production ceiling earlier in the week in an interview with Gulf Oil Review, which now appears to have been a expecations management exercise ahead of negotiations.
In light of downside pressures on demand, and the Eurozone crises in particular, Badri said he is “always worried that demand will slow down or open to the point when we cannot supply it.”
“We want to make sure that the market is very well supplied,” he told reporters.
Badri struck a positive note on the Eurozone, saying “I’m sure the EU can solve it, because if they cannot, we will have a catastrophe everywhere.”
If he is right, and prices hold up, the continuing divide between Saudi Arabia and the hawk bloc could ease. But further Eurozone turmoil could depress demand expectations rapidly, bringing the OPEC divide into even plainer relief.
Saudi also appears to be mindful that increasing US supplies may erode its position as a swing supplier – particular in lighter grades of crude – which is responsive to consumer demand and economic concerns.
OPEC failed to settle on a new Secretary-General yesterday, pushing the decision back to the organisation’s December meeting.
