Sam Fletcher
OGJ Senior Writer
HOUSTON, Sept. 18 -- At its ministerial meeting scheduled Thursday in Osaka, the Organization of Petroleum Exporting Countries should increase its production quota—but not its actual output—by 500,000-1 million b/d to regain market credibility, said financial analysts.
The 10 active OPEC members, minus Iraq, are currently producing 1.9 million b/d above their existing collective quota of 21.7 million b/d. "Compliance has weakened since February and the degree of 'overproduction' is now greater than at any time since 1997," said Matthew Warburton at UBS Warburg LLC, New York. "If OPEC wishes to maintain its hard-won credibility, it should raise quotas, at least moderately."
"Unofficially" matters
However, Marshall Adkins, Houston-based analyst for Raymond James & Associates Inc., St. Petersburg, Fla., said, "It doesn't matter what OPEC 'officially' does" at its upcoming meeting, "as they are likely to 'unofficially' adjust the spigot as needed in order to maintain mid-$20/bbl oil prices."
Those who claim greed has overrun OPEC's previous logic should "think again," he advised. "Facts show that the recent rise in OPEC production has been geared towards mitigating the significant drop in Iraqi production over the same timeframe (down to 700,000 b/d in the last 4 weeks). Can you say 'Let's maintain reasonable oil prices?'"
Moreover, Adkins said, "It is important to remember that despite the recent production increase, OPEC has still managed 75% average compliance during periods when production cuts have been in place."
He sees "an outside chance' that OPEC could raise its quota by as much as 1 million b/d. However, Adkins predicted, "If Iraqi crude oil production unexpectedly trends up, OPEC might actually 'unofficially' cut production. Likewise, if Iraq is completely removed from the market, then look for even more cheating to keep higher oil prices at bay."
"The focus on the issue of quotas is, to some extent, misplaced. Production and supply matter more for price-determination," Warburton agreed. "It is OPEC's crude supply in the next few months (that) will be the key to price movements, with or without military action against Iraq."
OPEC's fourth quarter production is not likely to be "particularly sensitive" to any quota decision in Osaka. "By the time they meet, most OPEC producers will have only limited flexibility in the October loading schedules, having already accepted nominations from most buyers," said Warburton. "We (UBS Warburg) project OPEC-10 crude production will average 23.8 million b/d in the fourth quarter, up from 23.6 million b/d in the third quarter." The company also assumes Iraq will export 1 million b/d of oil during the fourth quarter, under the United Nations-supervised oil-for-aid program.
OPEC divided
Meanwhile, OPEC members are so divided over whether or not to increase production quotas that a decision may not be reached until the final moments of the scheduled session, said Warburton. That meeting is scheduled to last 1 day with a second day available, if necessary, before the International Energy Forum opens its 3-day run Saturday in the same city.
"The outcome of the meeting is by no means certain, with most OPEC producers, led by Venezuela and Iran, publicly stating a preference for an unchanged quota," Warburton said. "Saudi Arabia is reported to prefer a quota increase but has not publicly confirmed this view. Bilateral discussions are intensifying. . .before the meeting, notably between Saudi Arabia and Iran, the two biggest OPEC producers."
Moreover, Warburton noted, "There may be some OPEC members opposed to US military action against fellow member Iraq who fear that a quota increase will send the wrong message to Washington and may increase the risk of US-imposed 'regime change.'"
So if opposition to a quota increase is solid and well organized among other OPEC members, Saudi Arabia may decide not to push for even a modest increase. "It may not be ready to risk a major internal confrontation now if it wishes to develop a common position after a US-led invasion of Iraq," Warburton pointed out.
He said, "The market would view no change to the quota for the fourth quarter as bullish, in the absence of any damaging signs of dissent from individual member countries."
When OPEC announces its decision, Warburton said, observers should look for:
-- Any reference to the $25/bbl price target in the official communiqué. There was none following the group's June meeting.
-- Any announcement on the quota share issue.
-- The date of the next meeting in November or December.
Contact Sam Fletcher at [email protected]