OPEC’s best adherence to its production ceiling in 18 months is failing to buoy the outlook for crude oil prices, raising pressure on the group to pare supplies amid burgeoning U.S. output.
While all but one of 20 analysts in a Bloomberg survey predict the 12-member organization will maintain its target of 30 million barrels a day at its May 31 meeting in Vienna, most say OPEC needs to conform better with the limit to keep supply from overwhelming demand. Societe Generale SA says the necessary reduction could be “substantial.” The Centre for Global Energy Studies says prices may tumble without output curbs.
The Organization of Petroleum Exporting Countries, which accounts for 40 percent of global oil supply, hasn’t stuck so closely to its output ceiling since the current level was set in December 2011, according to data compiled by Bloomberg. That hasn’t stopped Brent, against which more than half the world’s crude is priced, losing 7.3 percent this year, and falling as low as $96.75 a barrel on April 18, amid a combination of slowing global demand and surging U.S. shale supplies.
“They’re going to have to keep cutting,” Seth Kleinman, head of energy strategy at Citigroup Inc. in London, said by phone yesterday. “This market’s looking heavy in terms of supply, and it’s getting heavier, and there will come a stage when OPEC needs to address that weight problem. Supply growth will be robust and demand will consistently disappoint.”
Curbs by Saudi Arabia pared OPEC output to 30.6 million barrels a day in January, the closest to the group’s formal 30-million limit since its introduction in December 2011, data compiled by Bloomberg show. Output has since rebounded, reaching 30.9 million a day last month, a level about 900,000 a day more than both OPEC’s target and the amount the International Energy Agency estimates will be needed in the second half.
Bank of America Corp. cut its 2014 Brent crude price estimate to $105 a barrel from $112, citing the combination of lower demand and higher supply. There is a growing possibility that Brent will move into a range of $90-$100 after next year as “we now see less of a structural oil market deficit on softer emerging market activity and the rise in non-conventional oil supplies,” the bank said in a report dated yesterday.
Brent crude traded $1.28 lower at $102.95 a barrel on the ICE Futures Europe exchange as of 5:25 p.m. London time today, after averaging $108.84 this year.
“OPEC output has been creeping up, and the balances show that they should be producing significantly less,” Mike Wittner, head of oil-market research for the Americas at Societe Generale in New York, said by phone on May 21. “They ought to be producing closer to 30 million. This is the first year where OPEC, and the Saudis in particular, have to cut to offset the U.S. growth.”
U.S. crude output is near its highest in two decades as horizontal drilling and hydraulic fracturing, or fracking, unlock supplies from shale deposits in Texas and North Dakota. The nation pumped 7.4 million barrels a day in the week to May 3, the most since 1992, according to the Energy Department.
Ali al-Naimi, oil minister for Saudi Arabia, the world’s biggest crude exporter, said that current conditions are “the best environment for the market” and that “demand is great,” when he arrived in Vienna yesterday. The kingdom believes that all “new supplies are welcome,” he said in Istanbul on May 10.
“Will OPEC make these cuts? It depends on how healthy crude demand is,” said Societe Generale’s Wittner. “If they’re happy where prices are, and they should be, maybe they just hold it steady and don’t see a need to cut at this point.”
Group production will probably rise in the third quarter with the summer peak in demand for driving fuels in the northern hemisphere, and for power to generate air conditioning units in the Middle East, Wittner said. Since some of the extra Saudi output is consumed domestically rather than exported, it won’t exacerbate the global surplus or weaken prices, he said.
The one analyst in the Bloomberg survey who predicted that OPEC’s 30 million-barrel quota would be reduced didn’t specify by how much.
While members are unlikely at this meeting to set production allocations for individual countries, which haven’t been disclosed since 2008, the need to decide on these will become more pressing as Iraq seeks to more than double its capacity puts it in competition with Saudi Arabia, Jamie Webster, an analyst in Singapore at PFC Energy, said by phone May 22.
Iraq, aiming to reach 9 million barrels a day from about 3 million currently, would consider quitting OPEC if fellow members refuse to accommodate its higher output, Iraqi state minister Ali al-Dabbagh said in Abu Dhabi on April 23.
“You could describe it as essentially a cold war right now, and it’s going to hot up within the next couple of years,” Webster said. “The antagonists are still circling one another because no-one has hit the bell yet to say, okay, it’s time to figure out who’s going to cut and who can keep producing.”
Ministers may discuss the appointment of a successor for Secretary-General Abdalla El-Badri, whose tenure expires at the end of this year, said Webster. El-Badri, having completed two three-year terms, was given a one-year extension in December when members failed to agree on replacement candidates from Iran, Iraq and Saudi Arabia.
The three nominees to replace el-Badri are Saudi Arabia’s former OPEC Governor Majid al-Moneef, Iran’s former Oil Minister Gholamhossein Nozari, and Iraq’s former Oil Minister Thamir Ghadhban.
OPEC’s members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. Kuwait’s oil minister resigned and his brief will be administered by the country’s finance minister for now, the state-run KUNA news agency reported May 27.
While Brent is forecast to rebound to average about $109 a barrel in the third and fourth quarters, according to the median of 42 analyst estimates compiled by Bloomberg, prices remain successively weaker for monthly contracts for the rest of the year. December-delivery traded at $101.28 a barrel, or $1.67 less than the front-month contract. The median prediction for Brent in 2016 is $101.50 a barrel.
OPEC is likely to keep its collective production target unchanged this week, two delegates from different OPEC nations said yesterday and May 24. Both asked not to be identified because the decision isn’t final.
“Eternal vigilance is the price of keeping oil at $100,” said Leo Drollas, chief economist at the CGES, a consultant in London founded by former Saudi Arabian Oil Minister Sheikh Ahmed Zaki Yamani. “OPEC should get back to 30 million barrels a day by the fourth quarter, otherwise the price will start sagging and eventually fall heavily.”
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