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Wednesday, June 8, 2011

OPEC FAILS TO AGREE ON PRODUCTION, TRIGGERING OIL PRICE HIKES

The Organization of Petroleum Exporting Countries (OPEC) left its oil output target unchanged Wednesday, a decision that sent crude prices shooting higher on global markets and exposed deep divisions in the cartel amid calls for a hike in quotas.

Traders had speculated that OPEC would boost production to help cool high oil prices and in turn revive flagging economic growth.


“Unfortunately we are unable to reach a consensus this time to reduce or raise our production,” OPEC Secretary General Abdullah Al Badri said after the meeting in Vienna, where the oil cartel maintains its headquarters.

OPEC, which has a dozen member countries, kept its official output target at 24.84 million barrels per day (mbpd), where it has stood since January 2009.

However, the cartel is unofficially pumping above this level to compensate for OPEC member Libya, whose oil supplies have been ravaged by violent unrest since February. (Libya’s earlier output of 1.3 million barrels a day has been virtually taken off the market, as have about 300,000 barrels that Yemen, not an OPEC member, exported daily.) A Libyan representative also attended Wednesday’s meeting.

Saudi Arabian Oil Minister Ali Al Naimi, speaking to reporters after the decision, said it was “one of the worst meetings we ever had.”

The failure to do a deal is a blow for consumer countries hoping OPEC would take action to stem fuel inflation.

Following the latest OPEC decision, major stock markets fell on worries about a bleak global economic outlook, while oil prices jumped.

Crude oil for July delivery rose $2.59, or 2.6 percent, to $101.68 a barrel at 12:40 p.m. on the New York Mercantile Exchange. The contract is heading for the biggest gain since May 18. Prices are up 41 percent in the past year.

Brent crude oil for July delivery climbed $1.58, or 1.4 percent, to $118.36 a barrel on the London-based ICE Futures Europe Exchange.

World stocks as measured by the MSCI world equity index .MIWD00000PUS slipped 0.5 percent. The Thomson Reuters global stock index .TRXFLDGLPU also lost 0.5 percent. Emerging market stocks .MSCIEF fell 0.6 percent.

“We have noted with disappointment that OPEC members today were unable to agree on the need to make more oil available to the market,” said the West’s energy advisor the International Energy Agency.

The United States had put pressure on Saudi Arabia to deliver a credible deal to cap crude prices and underpin faltering economic growth.

Mr. Naimi said OPEC’s four Gulf Arab countries proposed the 12-member group increase output by 1.5 million barrels a day to 30.3 million barrels a day, including Iraq which is not bound by an OPEC quota.

But they were left isolated by a majority of seven -- Libya, Algeria, Angola, Ecuador, Venezuela, Iraq and Iran -- who wanted to keep production unchanged. Nigeria’s position was not known.

Iran said the view of the majority was that supplies were adequate for the time being and that it had proposed delaying a decision on more oil by two or three months.

“Iran believes there is no shortage of supply,” acting Oil minister Mohammad Aliabadi told Reuters. “There is no request that we cannot meet, therefore there was no need to raise output and that was the opinion of many other OPEC members.”

Mr. Aliabadi, whose country holds the rotating OPEC presidency, acknowledged that there remained “much uncertainty about the strength of the world economic recovery.”

Mr. Badri meanwhile told reporters that OPEC had spare capacity of between 4.0-4.5 mbpd. That compared with 6.0-6.5 mbpd before the Libyan unrest erupted in February.

“There is enough supply in the market, there is no shortage whatsoever, even in the absence of one country, but ... we are not in crisis at this time,” said Mr. Badri, referring to the troubles in Libya. “The reason that we are unable to reach a decision is that everyone has its own data .. some of them (the member nations) have different numbers.”

Analysts said that while there were opposing views on whether markets required more crude, the backdrop to the disagreement revolved around political tensions in the Middle East and North Africa and differences over how to respond to consumer demands.

“One factor is a diverging market view. Another is politics,” said analyst Samuel Ciszuk at IHS. “At times of heated politics/ideological debate, Saudi Arabia struggled to dominate as much as it could have given its size vis-a-vis others in OPEC.”

Gulf Arab producer Qatar has given support to Libyan rebels fighting the government of Libya’s Muammar Qaddafi. And Saudi Arabia has angered Shiite Iran by using force to support the Sunni Bahraini government in suppressing a Shiite rebellion.

Easily OPEC’s biggest producer, Saudi Arabia normally gets its way. (Saudi Arabia exports nearly 9 million barrels daily.)

But this time those in OPEC politically opposed to the United States -- led by Iran and Venezuela -- found enough support to block Riyadh.

“Saudi is the cartel member most interested in earning political ‘points’ with consuming countries, and maintaining its image as a reliable supplier of last resort,” said Katherine Spector at CIBC World Markets. “Venezuela and Iran likely feel they have less to gain politically by increasing quotas as a symbolic gesture.”

The only country with significant spare capacity, Saudi Arabia will now raise output unilaterally but it will be a “stretch” for the Saudis to add on their own the 1.9 million barrels a day of production needed to meet the 30.87 million daily demand OPEC forecasts for its oil in the third quarter. (The daily global demand is almost 90 million barrels; the two-thirds of oil not supplied by OPEC comes from big non-OPEC producers such as Russia, Canada, Norway, Mexico and Britain.)

“This agreement ... means death to the existing quota system, an invitation for countries to do anything they want until the next OPEC meeting,” said a senior Gulf delegate.

Earlier in the week a Gulf official said Saudi was already raising output in June to 9.5-9.7 million bpd.

Saudi output was last as high in the middle of 2008 after oil prices set a record $147 a barrel, shortly before global recession sent prices crashing.

OPEC’s own forecasts suggest more oil is required to stop oil prices rising again.

OPEC’s Vienna secretariat sees demand in the second half of the year 1.7 million bpd higher than current cartel output -- in line with Saudi Arabia's proposals.

“Ongoing supply disruptions, as well as the fragile state of global economy, call for a prompt increase in supply on a competitive basis that will allow refiners to boost throughputs and meet rising seasonal demand,” a statement from the IEA said.

OPEC has six months to cool off. Iran offered to host a meeting in August or September but Gulf producers declined. The next scheduled meeting is on December 14 in Vienna.

Global oil demand will climb to 89.18 million barrels a day during the third quarter, the highest level of 2011, the US Energy Department said Tuesday.

(Sara Ghasemilee, a senior editor at Al Arabiya English

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