OPEC plans to reassess its options in July

The Organization of Petroleum Exporting Countries delayed making any production changes during its Tuesday meeting in Vienna, saying it will reassess crude inventories and market prices during a July 3 emergency meeting. The wait-and-see approach comes after Iraq halted its oil exports to protest the UN decision to extend its oil-for-food program for only 1 month.


Paula Dittrick
OGJ Online

HOUSTON, June 5 -- The Organization of Petroleum Exporting Countries delayed making any production changes during its Tuesday meeting in Vienna, saying it will reassess crude inventories and market prices during a July 3 emergency meeting.

"We're all going to wait and see what Iraq does," Michael C. Lynch, chief energy economist at DRI-WEFA Inc., told OGJ Online Tuesday. "OPEC is torn between inventories rising and concerns that supply could get tight."

OPEC's output quota as of Apr. 1 was 24.2 million b/d. Some analysts are predicing production hikes although the timing remains uncertain.

On Monday, Iraq halted its oil exports to protest the UN decision to extend its oil-for-food program for only 1 month instead of the regular 6-month extension.

Several OPEC representatives have indicated OPEC members are ready to make up any supply shortages as a result of Iraq's embargo.

"I think they can come close enough that the market won't notice," Lynch said. "If the market were strong, it might be different, but the market is weakening." Demand has softened in Asia and Europe, he said.

OPEC issued a brief statement saying, "Stocks of both crude oil and products are at satisfactory levels ... if present conditions continue, the balance presently observed in the market can be expected to continue until yearend."

UBS Warburg LLC issued a research note Monday saying OPEC has the spare capacity to replace Iraqi exports. UBS Warburg estimates production from 10 OPEC members "to be 24.7 million b/d against capacity of 28.7 million b/d, giving estimated spare capacity of 4 millon b/d, with all except Indonesia having some share of this."

Michael Rothman, senior energy market specialist with Merrill Lynch & Co., was in Vienna for the OPEC meeting.

"A production hike by the OPEC countries appears highly likely, but the real question facing the producer group boils down to when," Rothman wrote in a research note Tuesday. "Our sense is that ministers want to avoid making a hasty decision about adding oil volumes for fear of supplying too much crude too soon."

Rothman said a quota hike of up to 1.5 million b/d seems warranted, looking at projected inventory statistics for the last half of the year.

"If however, after July 3, we see the Iraq-UN stalemate become extended, OPEC faces having to address the 2.1-2.2 million b/d of lost exports. A combined quota hike of both these volumes would exhaust all but Saudi Arabia's spare production capacity," Rothman said.

Energy Security Analysis Inc. (ESAI) of Boston said it believes a production increase is likely later this summer.

"ESAI believes it is likely that OPEC will wait for the basket price to rise over $28/bbl for the requisite 20 trading days before officially sanctioning any production increase (as per the price band mechanism). In the meantime, if prices rise too high, ESAI feels it is likely that those OPEC members with spare capacity will quietly increase production anyway."

Contact Paula Dittrick at paulad@ogjonline.com

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