By OGJ editors
HOUSTON, June 26 -- As anticipated, members of the Organization of Petroleum Exporting Countries voted Wednesday to continue their current oil production quota through September.
During a brief meeting in Vienna, OPEC members also called on other oil producers and exporters to cooperate in curbing crude supplies to match demand "to minimize price volatility and maintain market stability."
The 10 active OPEC members, excluding Iraq, agreed in December to cut their total production by 1.5 million b/d during the first 6 months of 2002. Russia, Norway, Mexico, Oman, and Angola also pledged production or export reductions totaling 462,500 b/d for the same period. However, Russia and Norway have since said they plan to increase their oil production and exports in the last half of this year.
OPEC ministers agreed to meet again on Sept. 18 to reassess world market conditions.
Government and business officials in some oil-consuming countries had called for OPEC to increase production in anticipation of increased demand with the revival of world and, especially, US economies in the second half of this year.
However, Tyler Dann, energy analyst for Banc of America Securities LLC, a subsidiary of Bank of America Corp., said Wednesday, "The mood within OPEC is demand-reactionary rather than demand-anticipatory, and we expect that OPEC will only increase the official quotas in the face of a sustained high oil price or evidence that a demand increase has already occurred."
Dann estimates that OPEC members currently are in 72% compliance with their production quotas, which translates into additional production of 1.4 million b/d in excess of the official production target of 21.7 million b/d (OGJ Online, June 25, 2002).
OPEC decided to rollover its existing production quota "based on the most risk adverse and hence highly pessimistic view of global (supply and demand) balances" in order to "put a floor under prices and defend the downside," said Paul Horsnell, head of energy research for London-based JP Morgan Chase & Co.
"However, it does also mean that (potential market) surprises are biased in one direction, and that will be supportive to prices," he said.
The biggest potential surprise is that the International Energy Agency and other analysts might be seriously understating the possible increase of world oil demand in the upcoming third quarter, said Horsnell in a report issued Tuesday.
He sees world demand for oil escalating to justify an increase of 1.6 million b/d in OPEC production during the third quarter. That compares with projections of 600,000 b/d by IEA, 500,000 b/d by OPEC, and 200,000 b/d by officials at the US Department of Energy. By the fourth quarter, Horsnell expects world demand will require an extra 2.6 million b/d from OPEC. That's up from estimates of 1.7 million b/d by IEA, 1.1 million b/d by OPEC and 900,000 b/d by DOE.
All of that is based on the assumption that global oil inventories will remain constant, he said.
Horsnell noted that previous second quarter demand estimates "are steadily being revised upwards." That, he said, "might lead one to expect that (third quarter) estimates would also go up. After all, the macroeconomic factors leading to an upside surprise in (the second quarter) also impact on (the third quarter)."
However, many forecasters are not making similar adjustments in their third quarter estimates because they "seem unwilling to let go of a pessimistic view of demand," said Horsnell. "Indeed in some cases. . .there is a suggestion they may even be depressing (third quarter) numbers in order to compensate for the (second quarter) surprise and hence keep their annual forecast flat."
He said, "We also believe that OPEC and the DOE have an overly optimistic view of non-OPEC growth over the rest of the year, and we share the more downbeat view in the second half held by the IEA."