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OPEC retains current production

Sam Fletcher
OGJ Senior Writer

As was generally expected, oil ministers of the Organization of Petroleum Exporting Countries made no official production changes during their brief Dec. 11 session in Quito, Ecuador.

At the Centre for Global Energy Studies (CGES), London, analysts reported, “Ministers expressed their general satisfaction with the current level of oil prices, even though the OPEC basket of crudes was trading well above the $70-80/bbl range that was described as ‘a good price’ for oil by Saudi Arabia’s minister.” The average price for OPEC’s basket of 12 reference crudes closed at $87.65/bbl Dec. 10, down 26¢ for the day. For the year through that date, the OPEC basket price averaged $76.71/bbl.

At that meeting, OPEC Sec. Gen. Abdalla al-Badri insisted current prices near a 2-year high of $90/bbl are not hurting the world economy but reflected the weakness of the US dollar, although historical data do not support his assertion. In fact, Al-Badri suggested OPEC’s own members are hurting most because they sell their oil priced in US dollars and buy in euros.

Since the beginning of 2007, a $90/bbl oil price would, on average, have translated to €65/bbl, about €1/bbl below the Dec. 10 price. However, CGES analysts said, “Over the past 4 years, $90/bbl oil has rarely been worth more to producers in euro terms than it is now. The US dollar may have weakened against the euro since June, but it is still some 2.5% above its 5-year average value against the European currency.”

In its latest monthly report prior to the meeting, OPEC said the world economy continued expanding with 2010 growth revised up to 4.3% from 4.1% previously on better-than-expected growth in the manufacturing sector. Growth in 2011 also was revised to 3.8% from 3.6%. The US economy is forecast to grow 2.8% in 2010 and 2.4% in 2011. World oil demand growth in 2010 is forecast at 1.5 million b/d, a 200,000 b/d increase. For 2011, world oil demand growth is pegged at 1.2 million b/d, unchanged from the previous OPEC report.

That same week in its monthly Oil Market Report, Paris-based International Energy Agency increased its 2011 global oil demand forecast by 260,000 b/d to 88.8 million b/d, representing 1.6% growth over last year. IEA officials expect demand growth to be led by developing economies, with China accounting for more than half the growth outside of the Organization for Economic Cooperation and Development members. Chinese crude imports surged by 1.1 million b/d in November, and China alone is expected to account for more than 35% of demand growth this year.

On the supply side, IEA’s projection for non-OPEC supply in 2011 is unchanged at 53.4million b/d, but it raised its OPEC supply estimate 100,000 b/d to 29.5 million b/d.

Gas drilling
“Independent natural gas producers are rarely known for their capital discipline,” said analysts in the Houston office of Raymond James & Associates Inc. In fact, they claim, “Most E&P management teams are hard-wired to do two things: 1. drill as many wells as they can afford; and thereby 2. grow production as much as they can. To recognize this point is to understand why the North American gas glut is so severe and so protracted.”

Raymond James offered “four main reasons” why US gas drilling will likely remain robust in 2011 despite “relatively weak” gas prices.

“First, the producers have financial backing from large strategic partners, mainly joint ventures with integrated majors and international conglomerates (or drilling with other people's money).

“Second, many E&P operators are drilling to hold acreage or fulfill minimum volume commitments.

“Third (and most importantly), we expect increased drilling in liquids-rich ‘gas’ plays such as the Eagle Ford where the lucrative returns from liquids compensate for poor gas returns.

“Finally, we cannot ignore the fact that there are many gas basins (i.e., Marcellus and Pinedale) where economics are still very attractive in a sub-$4/MMbtu gas world.”

(Online Dec. 13, 2010; author’s e-mail: samf@ogjonline.com)


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