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OPEC agrees 30 mbpd output limit, includes Iraq

Cartel, wary of economic turmoil, looks to unite behind 30 mbpd target

Saudi Oil Minister Ali Al-Naimi won agreement after negotiations with Iran. GETTY IMAGES
Saudi Oil Minister Ali Al-Naimi won agreement after negotiations with Iran. GETTY IMAGES
OPEC states are expected to agree a new production target of 30 million barrels per day for H1 2012. GETTY IMAGES
OPEC states are expected to agree a new production target of 30 million barrels per day for H1 2012. GETTY IMAGES

On 14 December the 160th meeting of OPEC oil producing countries concluded with an agreed cartel-wide production target of 30 million barrels per day (bpd).

“We have an agreement to maintain the market in balance and we’re going to adjust the level of production of each country to open space for Libyan production,” Venezuelan Energy Minister Rafael Ramirez told reporters in Vienna.

The output limit includes including Iraq, which has no national quota, and Libya.

The move marks OPEC’s first output limit change since December 2008, when it was set at 24.84 million bpd, excluding Iraq. The cartel’s latest figures show it is currently overshooting this amount by around 2.81 million bpd.

Brent crude, the global benchmark, fell 1.8% to $107.06 a barrel on Tuesday after OPEC announced the deal.

The agreement was clearly calculated as a show of unity between the members. However, the tough decisions – about who will cut production to make room for Libya and Iraq under the production ceiling, and how much – were left unanswered.

Making room

According to the International Energy Agency, which represents oil consumer countries, OPEC currently produces 30.68 million bpd including Iraq. OPEC estimates that the cartel countries pumped about 30.3 million bpd in November.

With Libya and Iraq rapidly increasing production, cuts in production from other member countries will have to be implemented quickly if the production ceiling is to be met.

Libya has returned to crude exports much faster than most analysts expected. The National Oil Company says it expects to export an average of 290,000 barrels per day through December. In addition, the NOC’s Agoco subsidiary – which is much closer to the former rebels and controls oil assets in East Libya – is independently marketing a further 60,000 bpd, according to a Reuters report.

Pre-war production is slated by the NOC to return by the second half of 2012, at which point Libya will re-enter the quota system, said Libyan oil Minister Abdurrahim Ben Yazza.

OPEC Secretary General Abdullah el-Badri said Libya is now producing 1 million bpd, which will rise to 1.3 million bpd by the end of the first quarter in 2012 and to 1.6 million bpd by the end of the second quarter 2012.

Iraq is currently producing 2.95 million bpd. “By the end of next year I think it could be in the region of 3.5 to 4 million barrels per day,”Ahmed Al-Shamma, Iraq’s deputy oil minister, told Reuters on 14 December. The resolution of oil law disputes between Baghdad and the Kurdish Regional Government could see this figure rise further.

Iraqi and Libyan production hikes will require other OPEC members to scale back production if the target is to be credible.

It is likely that fiscally-constrained producers such as Iran, Ecuador and Venezuela, will resist calls from gulf states to share pro-rata responsibility for meeting the target, and will instead look to gulf Arab producers to reverse their June hike.

Saudi/Iran

The meeting follows extensive discussions between Saudi and Iran on 13 December , when a tentative agreement was struck to maintain current production levels and for Gulf producers to accommodate the return of Libyan crude to world markets and Iraq increases production, something the 'hawks' wanted to convert into some form of guarantee, but failed.

"If Libya increases it doesn't necessarily mean Saudi will cut," said Saudi Oil Minister Ali al-Naimi. "We don't react to that, we react to market demand."

"We had a friendly chat," Iranian Oil Minister and current OPEC President Rostam Qasemi said. "Everything is OK."

An increase the output limit to 30 million bpd is something of a victory for Saudi Arabia and its fellow Gulf producers, effectively ratifying unilateral production hikes since 2009, including the large hike by gulf producers from June 2011.

Saudi Oil Minister Al Al-Naimi has set his cards on the table in advance of the meeting, disclosing on Monday that Saudi is pumped 10.04 million bpd in November from 8.5 million bpd in January.

Production from Kuwait and the UAE also increased.

OPEC has not released country quotas publically for several years, and individual targets were not expected to be settled at the meeting. The group is mindful that, having persistent produced over target, its credibility with markets is not infinite.

In the post-meeting press conference, el-Badri, said the cartel will restore country-by-country quotas “once Libya reaches full production”. Badri believes Libya will return to pre-war production by the end of the June 2012, and Badri confirmed to Reuters that Quotas will be discussed at the next meeting. Haggling is likely before then, with Saudi looking to maintain its strong position.

Growth forecasts

Qasemi, who is also OPEC’s current President, told the meeting he is concerned about low economic growth, and forecasts oil demand increase of 1.1 million barrels per day in 2012. The IEA predicts demand growth of 1.3 million bpd.

The Eurozone crisis – which remains unresolved despite a recent summit – and rapidly weakening Chinese growth are driving oil demand predictions downward. In November, Chinese exports increased at their slowest pace since 2009.

Iraq will hold the OPEC presidency next year, raising the prospect of one of the scheduled meetings taking place in Baghdad. Kuwait now holds the vice presidency.

A founder of the 12-member producers group, Iraq currently has no production quota and has not had one since the Iran-Iraq war. The presidency is ceremonial, and passes between the OPEC states in alphabetical order.

The next OPEC meeting will be on 14 June 2012.

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