Bob Tippee
Editor
Days before an unusually interesting meeting of the Organization of Petroleum Exporting Countries, a reminder is in order.
OPEC does not produce oil. Not a drop. It therefore will not respond in any physical way to global calls to produce more oil. It can’t.
OPEC sets production limits for members other than Iraq, the sum of which is what everyone knows as the OPEC quota.
At its ministerial meeting June 8 in Vienna, OPEC will decide whether to adjust members’ production limits so as to lift the aggregate quota. The decision will say much about OPEC’s reading of the market and intentions for price.
The central question, though, is how much crude oil OPEC members actually produce.
OPEC’s three most important members—Saudi Arabia, Saudi Arabia, and Saudi Arabia—have been insisting the world has plenty of oil.
So far this year, that view seems valid. Crude oil inventories have been adequate relative to demand, although falling somewhat lately.
So what explains crude prices above $100/bbl? Probably some combination of dollar weakness and trader anxieties. There are plenty of those: over supply disruptions in the Middle East and North Africa, for example, European fiscal problems, and Chinese economic wobbles.
But even OPEC foresees strain in market fundamentals during the second half of the year. Its Monthly Oil Market Report for May implies an average, level-stock need for crude from members subject to limits of 28 million b/d in the second half—if Iraq keeps producing the 2.6 million b/d that the International Energy Agency estimates it did in April.
That second-half requirement for OPEC crude is 1 million b/d above estimated production by quota-bound OPEC members in the first half, recently 2.2 million b/d above the largely forgotten quota.
Hence, a prediction: On June 8, OPEC will raise the notional group quota to a level approximating current production. Then, as the year’s second half progresses, Saudi Arabia will produce enough to meet the need.
It happens all the time.
(Online June 3, 2011; author’s e-mail: [email protected])