The Organization of Petroleum Exporting Countries agreed Sept. 10 to "strictly comply" with their September 2007 production quota of 28.8 million b/d, implying a possible compromise for de facto reduction of some 530,000 b/d of overproduction.
OPEC's decision requires some adjustment of individual members' quotas to include new members Angola and Ecuador and the withdrawal of Indonesia, a member since 1962. Iraq, of course, remains exempt from the OPEC quota as it tries to rebuild its oil industry. Indonesia's exit and addition of Angola and Ecuador make "for a statement as clear as mud and for wide interpretations as to the desired level of OPEC production," said Olivier Jakob at Petromatrix, Zug, Switzerland. He noted "mainly two countries" producing above quotas, Iran by 280,000 b/d and Saudi Arabia by 510,000 b/d, while Nigeria and Venezuela are below quota. "The most likely scenario we see is for Saudi Arabia to make a slight cut (about 300,000 b/d) and to readjust depending on the output from Nigeria," he said.
A preliminary estimate by KBC Market Services, a division of KBC Process Technology Ltd. in the UK, puts OPEC's July production nearly 900,000 b/d above its official quota, "of which by far the largest portion (757,000 b/d) comes from Saudi Arabia." KBC analysts said, "The excess output from Saudi Arabia consists of the two production increases they announced in the middle of this year, amounting to 550,000 b/d, plus some extra production." They said Venezuela's actual production is 80,000 b/d below quota—"a symptom of Venezuela's production crisis."
'Soft' $100/bbl floor
KBC analysts said OPEC ministers were "concerned that a move below $100/bbl could turn into a serious price retreat reminiscent of the 2006-07 fall in crude prices, which saw a high of $78/bbl in August 2006 slide down to $52/bbl in January 2007. OPEC's response then was 1.7 million b/d of production cuts, and prices rebounded. Today, the fragility of the global economy means that drastic production cuts are not possible without risking further demand destruction and economic pain."
Saudi Arabia "would be perfectly happy" with prices of $90-100/bbl but "other OPEC members wished to give a stronger signal," said Paul Horsnell, Barclays Capital Inc., London. "For those members, it appears that the $100 level is shaping up as a sort of 'soft floor' or 'alarm bell' which, while triggering price-defensive actions, might not be perceived as the level where all available policy tools should be drawn upon. In that sense, OPEC's entering a price defense mode is the key signal."
He said, "On one hand, Saudi Arabia would seem to have more ability to defend prices now than ever before. The Kingdom is producing at a high level, and at the least the first 500,000 b/d that could come off the market would be purely at Saudi discretion. In other words, there would be expected to be considerable credibility in the ability to defend prices." However, Horsnell said, "The current oil market has very pessimistic sentiment, is almost totally focused on the demand side and is strongly affected by momentum investors. It might (indeed surely will), ultimately prove to be as much of a [pointless] 'Charge of the Light Brigade' experience as taking on Saudi Arabia to the upside proved, but we feel that the market might well try to push below Saudi Arabia's comfort levels," Horsnell said.
Meanwhile, the International Energy Agency in Paris lowered its global oil demand forecasts by 100,000 b/d to 86.8 million b/d for 2008 and by 140,000 b/d to 87.6 million b/d for 2009. "The data suggest that the demand impact of weaker economic conditions and high prices during the summer—when oil prices reached an all-time peak—was more marked than expected, notably in the US. Furthermore, the effects of the ongoing hurricane season on US demand are subject to considerable uncertainty," the IEA said.
However, Jakob charged that the IEA "has been a main component in the making of the oil price bubble" by "grossly overestimating demand growth." He said, "Over the last 3 months, the IEA had to revise down Organization for Economic Cooperation and Development demand in the second quarter by 800,000 b/d but has not made any correction to demand for the fourth quarter." Moreover, he said, "Most forecast agencies have not fully realized that the US turned during 2008 from a net importer to a net exporter of middle distillates, the consequence being that they are double counting demand and will necessarily have to make further downward correction to OECD demand in months to come."
(Online Sept. 16, 2008; author's e-mail: email@example.com)