OPEC prepares to wrestle market bears

13 December 2002

Saudi Arabia sought agreement at the 12 December OPEC meeting for an increase in output quotas but a cut in actual production. The meeting fell at a politically difficult time for OPEC, as the US challenged an Iraqi weapons dossier, Venezuela was rocked by an anti-government oil strike and new forecasts pointed to weak oil demand growth in 2003.

The organisation's official output quota was set at 21.7 million barrels a day (b/d) last December and has remained unchanged ever since. However, members' quota compliance has slipped dramatically. In October, the organisation produced some 3 million b/d above the ceiling, putting downward pressure on prices. 'There is a need to cut,' said Saudi Petroleum & Mineral Resources Minister Ali Naimi in London on 10 December. 'Most also agree the need to raise the ceiling.'

The kingdom was expected to seek an increase of about 1.5 million b/d in the official quota, while lobbying fellow members to reduce their actual output by a similar level. OPEC Secretary-general Alvaro Silva and Naimi had not consulted each other in advance of the meeting, but some other members had indicated their views.

'We're going to discuss two things,' said Iranian Oil Minister Bijan Zanganeh. 'First shall we 'officialise' some of the illegal output, or should we continue at this output level until the next meeting and then decide?' He stressed that the strong oil price was caused by political tension rather than market fundamentals.

However, several members were likely to privately contest output cuts. Nigeria and Algeria have both requested quota increases in recent months and Qatar is seeking a greater share in line with its increasing production capacity.

Whatever happens at the Vienna meeting could well be overshadowed by events in Venezuela. Protests against President Chavez are again reaching fever pitch after a seven-month lull. State oil company Petroleos de Venezuelahas become the focus of anti-government activity with a series of strikes.

Government attempts to use the armed forces to break the strike have repeatedly failed and production in early December fell to about 1 million b/d, from more than 3 million b/d in November. Chavez has been a central pillar in OPEC policy in recent years, playing a crucial role in the organisation's recovery after the 1999 oil price crash. If it won power, the opposition would likely reverse that policy to increase production at the expense of oil prices.

Iraq is of equal concern. However, the December meeting was not expected to address the issue directly, because the outcome of weapons inspections remains unclear. Iraqi exports fell in early December as the government called on OPEC to cut production.

While the political environment is uncertain, new research suggests the economic climate could be turning against OPEC. The International Energy Agency (IEA) said on 11 December that non-OPEC production would grow by 1.3 million b/d in 2003 against world demand growth of just 1 million b/d.

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