OPEC CONFLICTS GIVEWAY TO OIL BALANCE
By Myra P. Saefong
A DOW JONES COLUMN
The Organization of the Petroleum Exporting Countries will return to the spotlight next week as members attempt to make up for their failure to reach an oil-production agreement at the last meeting, which has oddly given way to a relatively balanced oil market, for now.
That's quite an achievement, with OPEC's summit in Vienna on Wednesday coming at a very complex time for the oil markets. There's a backdrop of events and factors--ranging from Iran's nuclear program, recovering Libyan output and the return of $100-a-barrel oil, to euro-zone debt turmoil, concerns over falling global oil demand and a boom in U.S. shale production.
The main focus of members at the OPEC meeting "would be the impact of the economic crisis in Europe on the global oil markets," said Anas Alhajji, chief economist at NGP Energy Capital Management in Irving, Texas.
Also of interest will be the "size of the room that some OPEC members, especially Saudi Arabia, will leave for growth in Iraq and Libyan outputs," he said, adding that "some of the old themes that we have been hearing in recent years will be repeated," such as blaming speculators and political events for higher oil prices.
At the last meeting in June, OPEC failed to come to an agreement over production, even as concerns over political turmoil among nations in the oil-rich Arab region were at a fever pitch.
"Since OPEC failed to reach a consensus in the last meeting, they will go to great lengths to have one this time," said James Williams, an energy economist at WTRG Economics. "The easiest way is to leave quotas unchanged."
That wouldn't be a surprise. OPEC hasn't officially made changes to its production quotas since it implemented a 4.2 million-barrel-per-day cut to actual production in January 2009, effectively setting the quota for 11 of the group's members at 24.845 million barrels per day.
The real surprise lies in the fact that OPEC will only need to maintain balance in the market, not create it.
OPEC has said that its official mission is to "ensure the stabilization of oil markets," and as usual, that leaves quite a big task ahead of it as members gear up for their second and final meeting of the year.
"By far, the political aspect will overshadow the business of oil," said Anthony Sabino, a professor of law at St. John's University, whose practice includes oil and gas law.
Specifically, "political tension around Iran and its [nuclear] intensions will make for a tense and uncertain set of meetings," he said.
In November, the International Atomic Energy Agency voiced "deep and increasing" concern about unresolved issues regarding the Iranian nuclear program and said the nation had developed the technology required to produce nuclear weapons.
U.S. sanctions on the purchase of Iranian oil are in effect, and France has called for a European boycott of Iranian oil, though without much support, said WTRG's Williams.
Of the 2.2 million barrels a day Iran exports, about 450,000 barrels a day are destined for Europe, with the countries at greatest risk from an embargo being Italy and Spain with combined imports of 320,000, he said.
"Recent U.S.-imposed trade sanctions on Iran and growing support in Europe to do the same have given Iran bad-boy status," said Mark Williams, a risk-management expert who teaches finance at Boston University.
"Iran's ability as rotating president of OPEC to push for higher prices could undermine a fragile global economy," said Boston University's Williams.
At the same time, OPEC will have to decide on a good balance between supply and demand against constantly shifting developments in the Middle East and North African countries, many of which still face political obstacles that threaten the production and transportation of oil in the region.
Production in Libya has been gradually ramping up toward pre-war levels of around 1.6 million to 1.8 million barrels per day. Output stood at close to 700,000 barrels a day, according to a top Libyan official in mid-November. That's well ahead of most market expectations.
Saudi Arabia had quietly ramped up production to offset oil-output losses from Libya. But in October, Saudi Arabian production fell by 140,000 barrels per day from a month earlier, as Libyan output increased by 260,000 barrels per day, according to a Platts survey of OPEC and oil-industry officials and analysts.
"The 600,000 barrels per day of Iranian oil currently being shipped to France and China can easily be replaced by the ramping back up of the Libyan oil of similar quality," said Bob van der Valk, a petroleum-industry analyst based in Terry, Mont.
That's despite what OPEC's secretary-general has said about Iranian crude oil supplies to Europe being difficult to replace if a European Union oil embargo against Iran takes hold, he said.
"OPEC has maintained a delicate balancing act," said Mark Williams. "It has kept oil prices high enough to reap significant profit, but low enough to avoid destroying a fragile economy."
But "if the Iran view wins out, and OPEC production is not increased, future price spikes could cause demand destruction and shove the global economy back into a second recession," he said. And in a new recession, "$60 oil would be less than a year away."
So far, OPEC has said it's content with prices, and that implies balance in the market.
Secretary-General Abdalla Salem El-Badri told reporters on Nov. 22 that crude-oil markets were "balanced," and current prices were at a "comfortable" level.
Before Thursday's dip back below $100 a barrel, crude-futures prices had closed above that level for six sessions in a row.
"I think many of the members are satisfied that $100 is a fair price," said Michael Lynch, president of Strategic Energy & Economic Research. But "the Saudis and Kuwaitis are probably concerned it can't be maintained," with production recovering in Iraq and Libya and starting to "look robust, while demand remains anemic."
Libya and Iraq are OPEC's most promising candidates to boost spare production capacity over the next few years, said James Williams.
Both have rival factions struggling for power, but a "peaceful and focused Iraq could add capacity at a rate that exceeds the growth in world consumption," he said. "With an aggressive program, Iraq could rival Saudi Arabia [production] in a decade."
OPEC will also need to consider changes in the oil-market landscape to maintain balance, particularly in the prospects for shale production.
"For the long run, OPEC is worried that the increase in oil production in North America will be at the expense of its market share," said NGP Energy Capital Management's Alhajji.
For now, Lynch believes that OPEC will come to a "quiet agreement" at the summit for the Saudis to reduce production to offset Libyan resurgence, but officially offer the "usual comments about adhering to quotas, especially in light of concerns about Europe."
Still, there are some analysts who expect to see a production hike.
Tom Box, an oil-and-gas industry expert based in Richardson, Texas, believes OPEC will announce a 30 million-barrel-a-day quota.
That would mark a sizable increase from the 24.845 million quota, but would also bring the official number closer to actual output. Total OPEC output -- including Iraq, which is not part of the quota -- was at 30.05 million barrels per day in October, according to the Platts survey.
Upping the official quota to 30 million would "formalize what has been going on for years," said Mark Williams, referring to OPEC's well-known practice of producing oil above official quotas. Quotas at 30 million will "keep oil at $100-a-barrel levels without subjecting the economy to sharp price spikes."
Box, who is also president of cement-industry consulting firm Box International Consulting, said there is actually more oil on the market than what is announced, particularly with Iraq as a member with no quotas, and oil prices trading at the $100 level.
Still, OPEC won't want to be seen as being part of any problem in relationship with the present challenges in Europe, a slowdown in China and the weakness in the U.S., he said.
Maybe the oil market will be able to boast balance for awhile longer.