Opec set to lose market share

14 June 2012

Oil exporting bloc production likely to remain flat as demand is hit by economic weakness

Opec crude production is forecast to remain stable over the next 18 months as members disagree over whether to raise the organisation’s output quota.

Several countries in the 12-member bloc have blamed excessive crude production for the collapse of oil prices. The Opec basket price has fallen by more than 30 per cent over the past three months to $94.99 a barrel on 12 June – the lowest price since January 2011.

Opec members Iran, Venezuela, Iraq and Angola have warned that world crude supplies are too high, while the group’s top producer, Saudi Arabia, is pumping oil at close to long-term record levels.

In its short-term energy outlook released on 12 June, the Washington-based Energy Information Administration (EIA) estimated Opec production to average 36.2 million barrels a day (b/d) in the fourth quarter of 2013, compared with 36.65 million b/d in the current quarter.

During this time, Opec’s share of world crude production will drop to 39.96 per cent of global output from 41.15 per cent as, over the same period, non-Opec countries are expected to increase output by 3.7 per cent to 54.38 million b/d.

Poor indicators for the EU, US and Chinese economies have had a dampening effect on crude demand forecasts, while lower fears over supply disruptions – especially at the Strait of Hormuz – has also added to the downward pressure.

According to the EIA, global oil markets have loosened in recent months with world production outpacing consumption by 0.7 million b/d in the first quarter, with this figure expected to expand to 1.2 million b/d in the current quarter.

Some analysts put this figure even higher. UK-based KBC Energy Economics believes that high Opec output is contributing to “world oil production currently running above enfeebled demand by more than 2 million b/d”.

Although Opec production is expected to remain flat, the contributions of its members could change significantly. Iran, Opec’s second-largest producer, is set to be hit by tightened US sanctions on energy-related financial transactions and an EU embargo on Iranian crude. The latter will take effect on 1 July.

The EIA forecasts that, even without taking into account the potential effects of these measures, Iran’s crude production will drop by 850,000 b/d day to 2.7 million b/d by the end of the year due to underinvestment.

Mohammad Ali Khatibi, Iran’s envoy to Opec, has accused Saudi Arabia, and its allies the UAE and Kuwait, of violation of the quota and driving down crude prices.

As Iran’s output falls, it will push to exert more control over Opec’s crude production to prevent a further slide in the oil price. But along with its production, Tehran’s influence within Opec could also wane, with neighbouring Iraq set to overtake Iran as the organisation’s second-most productive member later this year.

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