OPEC agrees to hike production quota and reduce cheating

In a move to improve their market credibility, ministers of the Organization of Petroleum Exporting Countries agreed Thursday to raise their collective production quotas by 6%, or 1.3 million b/d, while urging stricter compliance with production limits.

By OGJ editors

HOUSTON, Dec. 12 -- In a move to improve their market credibility, ministers of the Organization of Petroleum Exporting Countries agreed Thursday to raise their collective production quotas by 6%, or 1.3 million b/d, while urging stricter compliance with production limits.

Saudi Arabia, OPEC's most powerful member, had pushed the group to curb excess production by as much as 2 million b/d while simultaneously hiking the total quota by 1.5 million b/d. The result, the Saudis claimed, would be an increase only on paper, adding no new barrels of oil to the market.

The new quota total of 23 million b/d becomes effective Jan. 1. The current combined quota for OPEC's 10 active members, minus Iraq, is 21.7 million b/d. Analysts estimate OPEC members are producing 2.5 million b/d above their current quota.

OPEC Conference Pres. Rilwanu Lukman stressed that the quota increase is "conditional on the organization reducing its overproduction." The amount of cheating among OPEC members increased this fall, leading some observers to question OPEC's credibility. However, some key industry analysts claimed the so-called cheating by some OPEC members was merely a means of making up the shortfall in Iraq's oil production during much of that period. They argue that OPEC has worked skillfully to balance oil supplies with world demand.

As a result, the average price for OPEC's basket of seven crudes was $26.70/bbl Wednesday, near the top side of the group's targeted range of $22-$28/bbl. OPEC supplies about a third of the world's crude.

Lukman attributed the current high price for oil partly to "the uncertainty that has been created by the political tensions in Iraq and, most recently, Venezuela."

While Iraq was not mentioned in OPEC's final communique, members expressed their "readiness, if and when necessary, to temporarily assist PDVSA (Petroleos de Venezuela SA, Venezuela's state oil company) in the supply of hydrocarbons to its domestic and international customers."

An estimated 95% of PDVSA's employees are participating in a nationwide strike aimed at forcing Venezuelan President Hugo Chavez out of office. Subsequently, PDVSA's oil production has fallen to 600,000-650,000 b/d, less than a third of its previous output (OGJ Online, Dec. 12, 2002)

Lukman also said prices were high due to "the discrepancy between production targets and production realities." Downplaying concerns over the discrepancy as largely due to speculation by the media, Lukman said, "Consumers have received all the crude they require and prices have remained well within our price band."

Still, he said, "We need to look carefully at our existing production agreement, to see whether it needs revision to reflect the current realities in the market and to accommodate the anticipated trends over the coming year."

Most analysts are still projecting a fairly robust increase in world demand for oil in 2003. At the same time, there remains a strong possibility of military conflict between US-led forces and Iraq that might disrupt some Middle East oil supplies.

Nonetheless, some OPEC members expressed concern earlier that continued cheating on production quotas risked a collapse in oil prices when winter demand for heating oil declines next spring.

OPEC members Thursday offered assurance of continued supplies in the face of political contingencies. Lukman called on non-OPEC producers "to continue to support OPEC's efforts to achieve sustainable order and stability in the international oil market." He said the market needs more than just "rainy day support" from non-OPEC producers if it is to thrive in the future.

Allocation of the production increase is expected to be on a pro-rata basis among the 10 active OPEC members. New output quotas for individual members were to be announced later. OPEC set March 11 for its next regular meeting in Vienna.

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