OPEC: Rolling out the barrels
OPEC called it 'an act of interim stabilisation' when, at an emergency meeting in Doha on 20 October, it announced a 1.2 million-barrel-a-day (b/d) reduction in output. The cuts came into effect on 1 November. But industry analysts are warning it is a promise that will be difficult to keep.
'Stabilisation cuts two ways - both when prices are too high or too low,' OPEC President and Nigerian Oil Minister Edmund Daukoru said soon after the meeting. 'Crude prices dropped by more than $20 a barrel in just about eight weeks, while the price build-up to where we reached $78 a barrel [in August] took two years. The market is clearly unstable.'
The reduction will come from current production levels, rather than from the mandated quotas of each member state. The sole exception will be Iraq, which at present pumps about 2 million b/d. Put statistically, OPEC's new target will be to produce 26.3 million b/d, as against 27.5 million b/d now.
OPEC is serious about its intentions. Daukoru has stated that there will be 100 per cent compliance. 'The new targets are internal. Each country knows unambiguously what they have to cut. Collectively, we are committed,' he said.
And there was early evidence of OPEC's commitment. Traders at Amsterdam-based Vitol said in late October that Saudi Arabia - OPEC's largest producer - had taken off some 200,000 b/d earmarked for the east of Suez market. This accounted for more than half of its committed share of 380,000 b/d in production cuts.
But analysts present a different picture. 'I doubt if cuts would be anywhere near 100 per cent,' Leo Drollas, deputy director at the London-based Centre for Global Energy Studies, said in late October. 'OPEC production has already been in a downward slide in the past few months due to a Saudi pricing policy that discouraged refiners from buying heavier grades of crude. I do not think they [OPEC] are going to cut much more than 500,000 b/d in December and very little before that. Wellhead production levels are unlikely to change substantially.'
Similar thoughts are being expressed within the industry. 'OPEC's track record on compliance with production cuts has left a lot to be desired,' said a recent Deutsche Bank statement. 'What it [OPEC] promises to do and what happens in reality have not typically converged… Most member states have benefited from a substantial improvement in their current account positions through higher oil prices and it is likely they will be keen to maintain that position.' And while a wholesale cut might ensure price stability in the long term, most OPEC members will be tempted to reap the short-term cash benefit of high production levels.
As the IMF points out in its regional economic outlook for the Middle East and Central Asian states, goverments have come to enjoy these benefits. 'High commodity prices, robust global growth, low interest rates and accommodative monetary policies in some countries underpinned average real GDP growth of 6 per cent in 2005... well above the 4 per cent average growth recorded in 1998-2002. With oil prices soaring to $53 a barrel in 2005 from $39 a barrel in 2004, oil exporters' terms of trade improved sharply. These countries have seen their current account surpluses increase to more than 21 per cent of GDP, reflecting high savings rates.'
Outside the Gulf, however, the picture is not so rosy. In Venezuela, excessive expenditure on state-run industry has pushed the South American state further into debt. 'It is probably now essential for oil prices to be maintained at $50-60 a barrel,' says Sarah Emerson of Boston-based Energy Security Analysis.
There is yet another factor that is likely to prevent member states from slashing output - the sheer need for petro-dollars to fuel ongoing oil sector projects. A case in point is OPEC's second largest producer, Iran, which has been set a target of reducing output
OPEC called it 'an act of interim stabilisation' when, at an emergency meeting in Doha on 20 October, it announced a 1.2 million-barrel-a-day (b/d) reduction in output. The cuts came into effect on 1 November. But industry analysts are warning it is a promise that will be difficult to keep.
'Stabilisation cuts two ways - both when prices are too high or too low,' OPEC President and Nigerian Oil Minister Edmund Daukoru said soon after the meeting. 'Crude prices dropped by more than $20 a barrel in just about eight weeks, while the price build-up to where we reached $78 a barrel [in August] took two years. The market is clearly unstable.' The reduction will come from current production levels, rather than from the mandated quotas of each member state. The sole exception will be Iraq, which at present pumps about 2 million b/d. Put statistically, OPEC's new target will be to produce 26.3 million b/d, as against 27.5 million b/d now. OPEC is serious about its intentions. Daukoru has stated that there will be 100 per cent compliance. 'The new targets are internal. Each country knows unambiguously what they have to cut. Collectively, we are committed,' he said. And there was early evidence of OPEC's commitment. Traders at Amsterdam-based Vitol said in late October that Saudi Arabia - OPEC's largest producer - had taken off some 200,000 b/d earmarked for the east of Suez market. This accounted for more than half of its committed share of 380,000 b/d in production cuts. But analysts present a different picture. 'I doubt if cuts would be anywhere near 100 per cent,' Leo Drollas, deputy director at the London-based Centre for Global Energy Studies, said in late October. 'OPEC production has already been in a downward slide in the past few months due to a Saudi pricing policy that discouraged refiners from buying heavier grades of crude. I do not think they [OPEC] are going to cut much more than 500,000 b/d in December and very little before that. Wellhead production levels are unlikely to change substantially.' Similar thoughts are being expressed within the industry. 'OPEC's track record on compliance with production cuts has left a lot to be desired,' said a recent Deutsche Bank statement. 'What it [OPEC] promises to do and what happens in reality have not typically converged… Most member states have benefited from a substantial improvement in their current account positions through higher oil prices and it is likely they will be keen to maintain that position.' And while a wholesale cut might ensure price stability in the long term, most OPEC members will be tempted to reap the short-term cash benefit of high production levels. As the IMF points out in its regional economic outlook for the Middle East and Central Asian states, goverments have come to enjoy these benefits. 'High commodity prices, robust global growth, low interest rates and accommodative monetary policies in some countries underpinned average real GDP growth of 6 per cent in 2005... well above the 4 per cent average growth recorded in 1998-2002. With oil prices soaring to $53 a barrel in 2005 from $39 a barrel in 2004, oil exporters' terms of trade improved sharply. These countries have seen their current account surpluses increase to more than 21 per cent of GDP, reflecting high savings rates.' Outside the Gulf, however, the picture is not so rosy. In Venezuela, excessive expenditure on state-run industry has pushed the South American state further into debt. 'It is probably now essential for oil prices to be maintained at $50-60 a barrel,' says Sarah Emerson of Boston-based Energy Security Analysis. There is yet another factor that is likely to prevent member states from slashing output - the sheer need for petro-dollars to fuel ongoing oil sector projects. A case in point is OPEC's second largest producer, Iran, which has been set a target of reducing outputThis content is only available to full MEED package subscribers (MEED magazine and MEED.com).
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