OPEC's 'Ordinary' Meeting Won't Be Routine -- Paris Uprising

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Date Posted: 10:16:11 06/04/11 Sat
Author: Friday, June 3, 2011===wednesday 8th of June 2011
Subject: OPEC's 'Ordinary' Meeting Won't Be Routine

OPEC's 'Ordinary' Meeting Won't Be Routine
by Myra Saefong
Friday, June 3, 2011

tweet3EmailPrint.SAN FRANCISCO (MarketWatch) — The regularly-scheduled meeting of the Organization of the Petroleum Exporting Countries next week will be anything but routine for oil — even if members officially decide to do nothing to the cartel's production levels.

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After all, OPEC's members won't be meeting under ordinary circumstances. Their decision will be made against a complicated backdrop of high oil prices and concerns over future global demand, production cuts in Libya and political turmoil among nations in the oil-rich Arab region.

"This should be an interesting meeting given so many volatile situations evolving," said Michael Bodino, head of energy research at Global Hunter Securities.

Within OPEC, it remains unclear who will represent Iran, the cartel's second-largest producer, and Libya. Production in Libya has been whittled down to a reported 200,000 barrels per day from 2010 total output of around 1.8 million in the wake of political uprisings meant to oust Col. Moammar Gadhafi.

Iranian President Mahmoud Ahmadinejad declared himself Iran's temporary oil minister last month, then appointed a new oil chief Thursday amid pressure from the nation's parliament, which had claimed that Ahmadinejad's self appointment was illegal, according to news reports. In Libya, the country's top oil official Shokri Ghanem on Wednesday announced his defection from Gadhafi's embattled regime.

These are issues the cartel will need to address before any clear decision can be made, said Bodino.

Meanwhile, OPEC also needs to consider challenges to global oil demand -- including the short- and long-term impact from the Japanese earthquake to concerns over mounting debt issues in a number of countries, to U.S. President Barack Obama considering tapping into the strategic petroleum reserve.

"Each one of these items creates its own suggested supply-demand shift," he said.

And in a rare move, the International Energy Agency has called on oil producers to boost supplies in the face of fears that high prices could damage the global economic recovery.

Futures prices for West Texas Intermediate crude trade around $100 a barrel in New York, up from the lows under $40 a barrel in February 2009. Brent crude in London trades above $115 and the price of OPEC's basket of twelve types of crude oils, as of Tuesday, stood at $111.20 a barrel.

The IEA, expressing "serious concern" over growing signs the rise in oil prices since September is affecting the economic recovery, said in a statement this month that there's a "clear and urgent need for additional supplies on a more competitive basis to be made available to refiners to prevent a further tightening of the market."

So while OPEC refers to its meeting on Wednesday in Vienna as "ordinary," the decision on production levels will be one made under extraordinary circumstances.

Producer predicament

The cartel hasn't officially changed its production quotas since its decision in December 2008 to cut production. At the time, members agreed to reduce actual production by 4.2 million barrels per day, effectively setting the quota for 11 of the cartel's members at 24.845 million barrels per day.

Since the output cut was implemented on January 1, 2009, crude futures prices in New York have more than doubled, though they've fallen from the end of April level near $114.

"If prices zoom out of control, that will hasten conservation moves," said Anthony Sabino, a professor of law at St. John's University whose practice includes oil and gas law.

"The effects of conservation, continued economic woes in the U.S. and just plain agony in Europe and elsewhere in the world is killing demand," he said. "Less demand means enough to go around and for less cost, and that's OPEC's biggest worry — staying relevant in a world increasingly trying to wean itself off oil."

As pressure mounts for OPEC to take action to lower prices, oil conservation is only part of many issues the cartel must address before making its decision.

OPEC will need to appease the working class enough to prevent revolt, said Mickey Cargile, founder and managing partner of WNB Private Client Services and Cargile Investments.

It'll also need to optimize pricing without causing a worldwide recession, and properly calculate the speculative influence on prices to set its production targets because misreading the influence could cause an oversupply, he said.

So OPEC's two main choices right now are to heed the IEA's recent call for an increase in production or leave output targets unchanged. Market expectations appear split.

"There are several concerns that could reduce world demand this year," said Todd Hultman, president of DailyFutures.com.

Japan may take longer to rebound from its earthquake than expected, China has been restraining the flow of credit which may slow its economy, the U.S. continues to be saddled with high unemployment and a miserable real estate market, and Europe continues to struggle with its debt problems, he said.

Given the uncertainties, "doing as little as possible is the safest approach right now," said Byron King, editor of Outstanding Investments.

This is a market where "an announcement of major supply increases could spook speculators and crash the price downwards," he said. "OPEC doesn't want to see wide, wild price swings."

Besides, uncertainties with both the Iranian and Libyan delegates make any agreements problematic, said Matt Parry, chief economist at energy consultancy KBC, and Saudi Arabia has already implied it will act to cover any shortfalls.

"Only Saudi Arabia, with a little help from Kuwait and the United Arab Emirates, has any significant spare capacity or in the past has shown any willingness to adhere seriously to quotas," he said.

Overproduction dilemma

On the other hand, a decision to hike output targets may seem like a sensible one given Libya's output cut and since OPEC's actual production levels already exceed its official quotas.

A "moderate" 1 million barrel-per-day quota hike is possible, said Michael Lynch, president of Strategic Energy & Economic Research, in order to "demonstrate an effort to rein in current prices."

But "this may prove to more of a public relation effort than represent an intention to increase production," he said. OPEC may try to bring quotas and production "back in line" by raising quotas to recognize current production, while encouraging members not to increase actual output.

The 11 OPEC members bound by quotas pumped an average 26.18 million barrels per day in April, according to a Platts survey of OPEC and oil industry officials and analysts released on May 9. That's down from the 26.52 million-barrel March estimate, but also more than 1.3 million above the official OPEC target, the Platts survey showed.

Production quota increases would need to be "meaningful," said Mark Williams, a risk-management expert who teaches finance at Boston University.

"Moving incremental production levels up by 1 million barrels per day will simply keep oil prices at current levels," he said, whereas an "aggressive" move of upping production quotas by 2 million barrels may push oil prices below $90 and dampen inflation expectations.

Hiking the quota wouldn't be easy, however.

Raising the quota would require agreement on a "new level, which is likely to be fairly controversial," said Catherine Hunter, an energy analyst at consultancy IHS.

Part of that would include "delineation of revised quotas with Libya out of the running, but also given rising budgetary needs in a number of OPEC states," specifically with Gulf members where pro-democracy uprisings, known as Arab Spring, have "provided a fillip for domestic spending to ease popular discontent," she said.

But with Arab Spring now running on to an Arab Summer and consumers openly calling for change, some "concessionary" moves from OPEC, particularly Saudi Arabia, remain likely, she said. "Further near-term assurances are now expected from the leading spare capacity holder, in the form of ad hoc production uplifts as demand dictates."

Myra Saefong is a MarketWatch reporter based in San Francisco.

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