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Analysis: OPEC meeting lookahead

Positioning intensifies as Saudi Minister arrives in Vienna early

Saudi oil minister Ali al-Naimi hopes to pour oil over troubled water. GETTY IMAGES
Saudi oil minister Ali al-Naimi hopes to pour oil over troubled water. GETTY IMAGES

Saudi oil minister Ali al-Naimi arrived in Vienna early ahead of the 8 June bi-annual session of the OPEC group. The move, accompanied by signals by al-Naimi that the Kingdom is ready to increase supply, are seen as attempts to reduce the scope for outright hostilities at the meeting.

OPEC will have to absorb changing political realities in the Middle East and North Africa, and uncertainly over supply policy following the release of mixed economic data from importing countries. Oil prices have already fallen on al-Naimi’s pronouncements.

Catherine Hunter, Energy analyst at IHS Global Insight, provides her analysis:

Last-minute positioning has increased ahead of this week's 159th OPEC meeting in Vienna (Austria), with some reported Gulf-producer calls for a quota increase of 1–1.5 million barrels per day (bpd), which would represent the first formal output increase since 2007, but plenty of factors and voices urging a "no change", at least at the OPEC-11 level.

With third-quarter demand expected to pick up significantly, the key question is whether OPEC as a whole rises to the challenge or whether this is left to one or two members to deal with unilaterally; the physical reality is likely to be the latter in either scenario, but with a co-ordinated course holding the potential for greater immediate price resonance.

In preparation for one of the most challenging sessions for some time, both in terms of gauging market fundamentals and in navigating the inter-group politics, Saudi oil minister Ali al-Naimi has already arrived in the Austrian capital two days ahead of the formal session on 8 June.

That gives al-Naimi some opportunity to conduct soundings with other representatives, many of whom will be new to the producer forum, including the representatives from Libya, Qatar and Kuwait.

Al-Naimi could possibly meet with Iran's representative too, depending on whether the new caretaker minister or OPEC governor attends following the unprecedented stand-off between the country's president Mahmoud Ahmadinejad and its Supreme Leader Ayatollah Ali Khamenei, which has taken form in a proxy conflict around the Oil Ministry.

Various recent reports suggest that the Saudis are favorably inclined towards an increase in output, concerned at fading economic growth in the Organisation for Economic Co-operation and Development (OECD) and particularly the US.

In addition, the producer group's Economic Commission Board met on Friday (3 June) and apparently advised an uplift in production, although without specifying an amount. That tends to support OPEC's market report of May, which saw a 2-million bpd uplift in the "call" on OPEC between the second and third quarters.

Various "Gulf sources" have also been quoted in the media as urging a higher official quota—which remains at the end-2008 agreed level of 24.85 million bpd—although set against that, fairly unambiguous statements for a hold have been issued by Angola, Iran and Algeria, all of whom see current prices and supply as "balanced".

Compounding the challenge are some clear reservations over how relevant any group-wide action will be—and will be seen to be—in the current circumstances, amid ongoing informal overproduction that has totalled some 1.4–1.6 million bpd in recent months.

Remaining spare capacity of 3–4 million bpd only really resides in the Gulf, with Libya out of the equation because of its ongoing conflict, while Ecuador, Nigeria and Angola have tended to produce at full capacity, regardless of quotas.

Further impairing that, Angola's output has fallen in recent months as a result of production problems and maintenance at the 180,000 bpd Greater Plutonio fields, which are due back online in July, putting it well below its budgeted production level of 1.9 million bpd, for which it has previewed an average price of $68 barrel.

Outside the formal quota system, Iraq is producing at the highest levels since the 2003 war, with the help of exports from the Kurdish fields as well as the first increments from the technical service awards, which are set to pick up further through the year, putting exports at around 2.25 million bpd in May.

Political Complications

Complicating the issue is a degree of political infighting—both intra-state and inter-state—rarely seen in the group outside occasional Iran-Venezuela-Gulf spats.

This is indicative of the wider backdrop of political turmoil and change in the Middle East region, which continues to dominate the group (8 out of 12 members).

In particular, the Libyan representative, whoever that might be, is more than likely to be from the side of the Libyan leader Muammar al-Qadhafi—despite strong support for the country's transitional government in Benghazi from Qatar in particular, amongst the smaller Gulf producers.

Qatar is helping the transitional government to market its occasional crude cargoes, while the Qadhafi government has very limited ability to produce or export any oil, making its involvement politically divisive—but, ultimately, theoretical.

Iran's representative too is likely to be the subject of internal controversy and potentially group embarrassment, if new caretaker minister Mohammed Aliabadi is sent to the meeting.

He will, at least nominally, be chairman at the session in line with Iran's holding of the rotating presidency.

His "energy industry" experience—beyond being an ally of President Ahmadinejad—is limited to say the least, although there may be some slight relief from the signs that Ahmadinejad himself is not expected to attend.

Outlook and Implications

Despite the apparent divisions on formal policy course, most OPEC members are currently happy with the market situation, with current oil prices at least officially above the levels required by most producers to break even on budgetary needs (see table).

Our own IHS Global Insight estimate for the Saudi budget is currently put at USD68/b, much higher than usual as a result of the two large spending packages of this year designed to assuage popular discontent amidst wider regional political pressures, but still modest in the current market.

The average across the 10 producers (nine plus Saudi estimate) is USD63/b, with Libya and the United Arab Emirates not publishing official figures. That compares with an OPEC basket price of USD110/b on 3 June, giving many producers a significant off-budget cushion.

While many members of the group have been shown to favour short-term revenue gain over long-term market needs particularly in the current political circumstances, the Gulf producers in particular—and to an extent North African members—are keen to ensure that they are not undermining global economic growth with their policy course.

That means that, regardless of the official outcome at this week's meeting, new production is likely to be released in line with demand requirements (albeit with a lag if indicators are awaited rather than pre-empted).

As always though, a co-ordinated or unilateral statement on new output in the near term is likely to have more near-term price resonance, but with the flipside then that this could potentially open the way for concerns about spare capacity down the line if global economic growth and wider Arab unrest continue.

With these caveats, a "no change" in group policy still seems the easiest official course, with the potential for promises of short-term uplifts, along the lines of those offered by Saudi Arabia in 2008, providing the combination of physical availability and near-term psychological reassurance, but enabling the retention of the current spare capacity cushion.

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