CGES: OPEC to focus on compliance, not cut output

By OGJ editors
HOUSTON, Mar. 11 --Analysts at the Centre for Global Energy Studies (CGES), London, said in Mar. 11 research note that although oil prices are far from the $75/bbl that Saudi Arabia's King Abdullah suggested was a 'fair' price prior to the Cairo meeting last November, the Organization of Petroleum Exporting Countries will not cut further its output target when it meets Mar. 15.

Instead, the organization will focus on compliance with the 4.2 million b/d of cuts to which it agreed last year, CGES said. Those cuts so far have stabilized oil at about 40/bbl, and full compliance should be enough to set oil prices on a gently rising path.

According to CGES's assessment of OPEC's February production, Saudi Arabia has gone beyond its agreed output cut, reducing production below 8 million b/d. Compliance has also been good among the other Gulf Arab countries—the UAE, Kuwait, and Qatar—all of whom are estimated to have implemented around 85% of their agreed output cuts.

Nigeria and Libya have implemented 60-70% of the output cuts they agreed to make, while compliance by Algeria and Angola is estimated to be 50-60%, CGES said.

Iran, Venezuela, and Ecuador, however, still have a long way to go to implement fully their agreed output cuts. Implementation in these three countries remains below 40%, with Iran's production 400,000 b/d above its quota level, and Venezuela's overproduction near 225,000 b/d, according to CGES estimates.

OPEC's total oil production in February was more than 1 million b/d above the target level agreed in Algeria in December, the analysts said.

Further output cuts, designed to push oil prices back up towards $75/bbl, may be counterproductive, CGES said.

"In the current fragile economic environment, further output cuts would tighten the market, but any price recovery would likely be short-lived, triggering a further weakening of demand, at least until the global economy begins to pick up again, a recovery that would be delayed even further by rising oil and energy prices. The net effect for OPEC could then be a combination of even lower production, with no sustained increase in prices, leading to lower, rather than higher, revenues," CGES said.

CGES expects that at the upcoming meeting, OPEC ministers will almost certainly agree to keep a close watch on oil market developments during this year's second quarter, a quarter that they still regard as being a period of weakness despite the fact that over the last decade, the only year in which oil prices weakened between the first and second quarters was 2003.