OPEC's output ills mean its job is done, for now

Monday 9 Jun 2014

It has been a long time since oil consuming countries waited for an OPEC meeting in trepidation.

The biggest consumer, the United States, appears to care less than others, bolstered by its own oil boom, and OPEC itself seems relaxed - despite huge production problems.

Only three years ago things looked dramatically different when Arab Spring unrest knocked out output of OPEC producer Libya. Then the cartel witnessed one of its most heated clashes when it met in Vienna - Iran blocking Saudi Arabia's proposal to increase production to cool prices heading towards $130 per barrel.

Days later that decision effectively triggered a U.S oil stocks release to help avoid a spike in gasoline prices less than a year before Barack Obama's re-election as president.

Fast forward three years, and OPEC is heading for what promises to be a serene meeting on Wednesday, despite Libya again exporting virtually no oil and Iranian output drastically curbed by sanctions.

Washington, enjoying a steep spike in its domestic oil output, has no message today for OPEC as the shale boom helps to anchor oil prices in a narrow range around $110 a barrel.

The cartel's leading producer, Saudi Arabia, enjoying oil prices comfortably over its favoured $100, is in favour of rolling over its current production ceiling.

And the spoiler of three years ago, Iran, is hoping for an easing of restrictions on oil exports, as Washington's punitive mood shifts to Russia after the Ukraine crisis.

"It is probably only due to the shale boom and the continuing perception that it will be sustained that oil prices have not broken out to the upside," said David Wech from JBC Energy.

"In the short term, not much is pointing towards a change in fortunes for OPEC."

The Organization of the Petroleum Exporting Countries is set to keep its output target of 30 million barrels per day unchanged when it meets in Vienna.

OPEC output is in line with the target and oil prices have stayed above $100 all year.

That is partly because Western sanctions on Iran, oil theft in Nigeria, conflict in Iraq and the almost total loss of Libyan output have cut OPEC's own supplies by more than 2 million bpd on the 90 million bpd world market.

"The best solution is to continue with the current ceiling," said a senior OPEC delegate. "Any increase from Iran, Libya or Iraq would be manageable in the second half of the year since there may be a higher requirement for OPEC oil."


OPEC's own figures show average demand for the group's oil rising to 30.35 million bpd in the final six months of 2014 from 29.2 million bpd in the first, and the International Energy Agency in May called on OPEC to pump more oil.

As well as OPEC outages, non-OPEC supply has failed to rise as much as predicted due to a slowdown in Russia and a setback for Kazakhstan, whose Kashagan oilfield - the world's biggest oil find in 35 years - may not resume output until 2016.

Despite the higher demand, delegates doubt OPEC will raise its formal output target, citing concern about the outlook for 2015 when non-OPEC supply led by the shale oil boom in the United States will eat into the group's market share.

"I don't see anything changing in terms of the 30 million barrels-per-day target," said an OPEC source. "It should be a fairly relaxed meeting."

But OPEC could face a much tougher challenge in coming months should output from Libya recover, Iraqi export growth continue and sanctions on Iran be lifted.

Iran, OPEC's second-largest producer until overtaken by Iraq, would be able to boost output by about 600,000 bpd a few months after a lifting of sanctions, say analysts and engineers who have worked there.

Libya's oil sector, despite damage to installations, is still technically able to pump at least 1 million bpd and Iraq has just opened a new export terminal in the south which has boosted capacity by 800,000 bpd.

Supply and demand balances from OPEC for 2015 show a further decline in demand for OPEC oil due to continued supply growth outside the group, leaving no room for OPEC to raise the 30 million bpd target.

So the extra supplies would probably require cutbacks by others in OPEC - particularly Saudi Arabia - to keep prices above $100. And OPEC may struggle to distribute cutbacks within the group, having dropped individual output quotas many years ago.

"Next year is another story. We could be in for a very challenging time," said the senior OPEC delegate.

"We could see more oil from Libya, Iraq and Iran, and there is no scope to raise OPEC's existing production ceiling. The indicator will be the price."

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