OPEC Decision Puts Onus on Saudi Arabia Should Oil Fall

OPEC’s decision to keep its output quota unchanged yesterday throws the onus on the group’s biggest producer, Saudi Arabia, to cut supply should crude prices extend their drop below $100 a barrel.

The Organization of Petroleum Exporting Countries would need to reduce output by 1.6 million barrels a day to comply with its targeted ceiling of 30 million barrels a day, Secretary-General Abdalla El-Badri said yesterday. Increased production from Saudi Arabia has been blamed for plunging prices by members including Iran, whose own exports are set to drop as a European Union embargo starts July 1. Saudi Arabia will make sure there is enough supply in the global crude market, the kingdom’s oil minister said today in an interview.

“It puts some of the onus on the Saudis, but at the end of the day, they’re going to remain very responsive to what happens in the world market,” Jason Schenker, president of Prestige Economics LLC, a commodity researcher in Austin, Texas, said in an interview in Vienna yesterday. Iranian supply will “come off the market with the full implementation of the embargo and that could push the number down toward 30 million,” he said.

Saudi Arabia has led the surge in OPEC’s output above its official limit this year, as Brent crude prices rose in March to their highest since July 2008 on concern sanctions against Iran will disrupt Middle East supply. Since then, signs that Europe’s debt crisis will erode fuel demand have driven the price back below $100, a level favored by its Oil Minister Ali al-Naimi.

Politically Charged

Brent crude traded at $97.53 a barrel at 2:47 p.m. in London today, down 24 percent from this year’s high of $128.40.

Yesterday’s gathering was strained by political tensions after Iran complained that other members were taking their customers as the EU boycotts its oil, warning that Saudi Arabia’s higher output risked causing an “imbalance” in the market. Al-Naimi suggested at the start of the week that OPEC may need to boost the ceiling to account for increased demand in the second half of the year and help ease the burden of high prices on consumers.

The desert kingdom has bolstered output by 11 percent in the past year to 9.9 million barrels a day last month, according to data compiled by Bloomberg. While OPEC no longer sets individual national quotas, by raising output to a three-decade peak, Saudi Arabia has done the most to push total OPEC supply above the target. The nation will cut production in the second half of the year to 9.5 million, “due to the lower prices and the massive global stock build,” JBC Energy GmbH, a Vienna-based researcher, said in a report today.

More Demand Later

While most OPEC ministers highlighted the current excess supply, some including Qatar’s Mohammed bin Saleh Al Sada said a portion of that would be absorbed by increased demand later this year. The OPEC secretariat’s own analysis in a monthly report showed demand for the group’s crude rising to 30.9 million barrels a day next quarter from 29.3 million currently.

Al-Naimi told reporters yesterday after the session that he was “happy” with the decision and that it was good for consumers.

“The whole idea is that there will not be any shortages in the market,” al-Naimi said in the interview with Bloomberg News. “That has been Saudi Arabia’s policy all along. To manage stability of the oil market, keeping it in balance.”

Saudi Arabia will honor any requests to supply its customers within the context of a stable and balanced oil market, according to an OPEC Gulf delegate with knowledge of Saudi oil policy. The person declined to be identified because he isn’t authorized to speak to the media.

Will Saudis Cut?

Some analysts doubt Saudi Arabia will restrain production as readily as Iran and Venezuela would like.

“No, Saudi Arabia doesn’t have to cut production,” Bill Farren-Price, chief executive officer of Petroleum Policy Intelligence, a Winchester, England-based consultant, said in an interview in Vienna yesterday. “It will continue to do what it has been doing until now: meeting customer demand. If customer demand drops, then they will cut back accordingly.”

OPEC hasn’t specified which nations should cut, Kuwaiti Oil Minister Hani Abdulaziz Hussain said. “There is no talk of any particular country” reducing, he said when asked if his country would be trimming output. The group’s limit is a collective one, Hussain said, adding that “it’s more of a wait and see.”

Iran Sanctions Impact

Iran pumped 3.2 million barrels a day last month, according to Bloomberg, as the EU ban nears and additional U.S. sanctions on Iran’s banking sector inhibit purchases from some non-European nations. Full implementation of the measures will “ultimately lead to a cut of some 1 million barrels a day in Iranian supplies” in the second half of the year, the Paris-based International Energy Agency said in a May 13 report.

Various waivers that the U.S. has granted to some of Iran’s customers means that “perhaps the impact will only be 400,000 barrels a day this summer instead of 800,000, but it’s still a loss,” according to Chakib Khelil, a former Algerian oil minister who held the OPEC Presidency in 2008.

The decision to leave the quota unchanged was in line with the outcome predicted by all 20 analysts and traders surveyed by Bloomberg News last week. OPEC will meet again on Dec. 12.

“The old ‘official’ quota is left unchanged as Saudi Arabia cannot at the same time commit to a supply cut to please OPEC and commit to replace Iranian barrels to please the G-20,” Olivier Jakob, managing director of Petromatrix GmbH in Zug, Switzerland, said in a report today.

The 12 members of OPEC are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

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