OPEC Set to Break 10-Year Habit of Supply Cuts During Routs

OPEC Set to Break 10-Year Habit of Supply Cuts During Routs
An oil tanker south of Sana'a, Yemen. Photographer: Paul Hilton/Bloomberg

For the first time in a decade, OPEC will maintain oil-output quotas while prices plunge as Europe’s debt crisis and China’s slowing growth curb fuel demand.

The Organization of Petroleum Exporting Countries, which supplies 40 percent of the world’s crude, will keep its official daily production ceiling at 30 million barrels when its 12 members meet in Vienna on June 14, all 20 traders and analysts surveyed by Bloomberg News said. The group has agreed to cuts at every meeting in the past 10 years that coincided with a price drop of more than 10 percent in the preceding three months, data compiled by Bloomberg News show. OPEC will probably keep the limit unchanged, a Middle East member state delegate said today.

Crude has fallen 22 percent in London since March 13 on mounting concern that Europe’s debt crisis will derail global growth and curb demand for energy. Saudi Arabia, the biggest OPEC member, is pumping the most in 33 years to bring prices below $100, a target set by its Oil Minister Ali al-Naimi. The group exceeded its official output level by 6 percent in April, according to the International Energy Agency.

“They’re not going to want to rock the boat,” said Mike Wittner, head of oil research for the Americas at Societe Generale SA in New York. “This is a very fragile time for the global economy so I don’t think they’re going to take any action. There’s no way that OPEC is going to announce any cut or even say that very strongly.”

Brent Gains

Brent crude, a benchmark contract for more than half the world’s oil, rose as high as $128.40 on the ICE Futures Europe exchange on March 1, 43 percent above the five-year average of $89.78. Its decline since then has been mirrored in the $5 trillion of market capitalization that was wiped off the value of global equities amid Europe’s worsening financial crisis and China’s slowest growth in three years.

The North Sea crude for July settlement swung between gains of as much as 2.8 percent and losses of 1.5 percent today, to trade at $98.97 a barrel on the London-based ICE Futures Europe Exchange, after Spain requested a European bailout to shore up its banks and China’s imports of crude climbed to a record.

OPEC left quotas unchanged amid plunging prices at a meeting on Sept. 27, 2001, after Brent had tumbled 18 percent following the Sept. 11 terrorist attacks. Prices were then 11 percent lower than three months earlier.

The group should raise its output limit, al-Naimi said in an interview with the Gulf Oil Review published today.

Higher Ceiling

“Our analysis suggests that we will need a higher ceiling than currently exists but, as usual, we will wait until we hear the presentation from the secretariat concerning the outlook for the international oil market, and the views of other member countries,” he said.

Saudi Arabia’s supply policy is opposed by Iran, the second-largest member of the group. The Gulf state is facing a full European Union ban on its oil exports from July 1 in response to its nuclear-research program. The 27-member EU and the U.S. contend it’s aimed at making atomic weapons, while Iran says it is for civilian purposes.

There is a risk of a “serious decrease” in prices because Saudi Arabia’s output creates “an imbalance,” Iranian OPEC Governor Mohammad Ali Khatibi said in comments posted on the oil ministry’s website May 29. A balance between supply and demand would require OPEC cutting output by about 1.5 million barrels a day, Hussein Allidina, the head of commodities research at Morgan Stanley in New York, said June 5.

Kuwaiti Oil Minister Hani Abdulaziz Hussain said today that some OPEC members are concerned about oil production levels and the direction of crude prices.

‘Tremendous Surplus’

“It is very clear that there are tremendous surplus quantities that led to this severe decline in the prices,” Iraqi Oil Minister Abdul Kareem al-Luaibi said today in Vienna. “This would not serve anyone.”

Oil prices at $100 to $120 a barrel are “a reasonable and acceptable price index,” al-Luaibi told a group of reporters.

OPEC pumped 31.85 million barrels a day last month, 1.85 million more than the limit agreed to at the last meeting in December, and 950,000 more than will be needed in the third quarter, according to the IEA. Saudi Arabia produced 10 million barrels a day, the Paris-based IEA said in a report May 11.

The group faced declining prices at 12 of the 33 meetings held since 2003, and announced supply cuts at seven. It reduced supplies at all four of the summits when prices had fallen more than 10 percent in the preceding three months. At the most recent of these, in the second half of 2008, OPEC agreed to the biggest curbs in its 53-year history.

‘Drift Downwards’

While OPEC will eventually need to reduce supplies by about 500,000 barrels a day to prevent Brent dropping below $90, prices are not yet low enough to trigger that action, according to the London-based Centre for Global Energy Studies, a consultant group founded by former Saudi Arabian Oil Minister Sheikh Ahmed Zaki Yamani. Saudi Arabia can tolerate as little as $87, said Leo Drollas, the CGES’s chief economist.

“The Saudis have been happy for the price to drift downwards, but maybe they didn’t expect it to go that quickly,” Drollas said in an interview on June 1. “Collectively they’re quite happy with the way things are. They think prices will stay where they are or rebound.”

OPEC, meeting from June 12, faces the prospect of taking a decision on supply five days before elections in Greece that may disrupt the global economy. A vote on May 6 failed to produce a government, increasing concern the country may leave the 17-nation euro. The Federal Reserve takes a decision on interest rates on June 20.

The two events “will set the cadence for the demand side,” said Jason Schenker, the president of Prestige Economics LLC, a commodity-research firm based in Austin, Texas.

Reduce Production

Saudi Arabia may start to reduce production from its 33-year peak, seven of the analysts surveyed by Bloomberg said. Al-Naimi announced the $100 target for Brent in Australia May 13.

Declining exports from Iran may be offset by rising supply from Libya and Iraq. Libya’s daily output reached a 16-month high of 1.4 million barrels in May while Iraq is pumping the most in more than a decade, data compiled by Bloomberg show.

OPEC’s advisory panel, the Ministerial Monitoring Committee, will meet at 4 p.m. on June 12 at the group’s headquarters in Vienna. Their recommendation will be reviewed by the 12 ministers on June 14 at the same time, with a decision issued about an hour later.

Ministers may also discuss candidates to replace Secretary-General Abdalla El-Badri, whose second term expires at the end of 2012. Saudi Arabia, Iran, Iraq and Ecuador have submitted proposals. The other members are Algeria, Angola, Kuwait, Libya, Nigeria, Qatar, the United Arab Emirates and Venezuela.

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