Derek Brower, VIENNA: JUST a couple of
months ago, as Brent oil prices looked to be drifting towards
$90 a barrel, seasoned Opec watchers were saying the
group’s meeting in Vienna on 31 May would be a
Iraq’s rising production, soaring
US output, weak global
demand growth and internal friction between
Opec’s price hawks and the Gulf producers would
make for frosty talks around the group’s horseshoe
table in the Helferstorferstrasse headquarters.
But as oil prices have firmed back above $100/b, the mood
has changed. There are unlikely to be any surprises, let alone
fireworks, at the meeting tomorrow. Opec will defer the big
questions until the next meeting.
By any historical measure, none of Opec’s
members should be complaining about oil prices, even though
economic mismanagement at home means some of them (Algeria and
Venezuela come to mind) now need Brent well above $100/b to
Most of the crowd hanging around Vienna’s
hotels this week can remember when a doubling of the oil price
meant it rose to $20/b.
Last year, the average
inflation-adjusted price of imported oil into the US, the
world’s biggest consumer, was $101.11/b –
slightly beneath the record high of 2011 ($102.65/b), but above
the devastating peaks in 2008 ($92.75/b), 1981 ($94.98/b) and
No wonder Opec’s producers are feeling flush. Ali
Naimi, Saudi Arabia’s oil minister and by far the
most powerful voice in Opec, told reporters in Vienna yesterday
that today’s prices were the "
best environment for the market".
Nor, for three reasons, is there yet any appetite in Opec to
deal with Iraq’s rising output by trying to impose
some kind of quota on the country.
First, although Iraq’s production growth last
year of around 300,000 barrels a day (b/d) to 3 million b/d was
healthy, the pace has slowed. Production of 3.139 million b/d
according to Opec, was barely above Iraq’s
third quarter 2012 average.
Iraq has been discounting its oil – annoying other
Gulf producers – the market has absorbed the extra
crude. When this changes, so will Saudi Arabia’s
patience. But with seasonal demand expected to rise during the
northern hemisphere’s driving season (and as
Middle East air conditioners max out), more Iraqi oil is a
Third, there are big risks to Iraq’s supply
– and to the production of several other group
members. Opec definitely won’t mention this in its
communiqué tomorrow. But
sectarian conflict in Iraq,
fighting in Nigeria, the possibility of more sanctions (or,
worse, war) against
Iran, and rising political risk in
Algeria hangs over the group.
It leaves Opec in a tricky position, at the mercy of events
beyond its control.
The macroeconomics look weak, leaving big questions marks
hanging over the outlook for demand. The IMF yesterday
lowered its GDP forecast for China, to 7.75%, while the
OECD cut its
growth outlook for the world economy by 0.3 percentage
points to 3.1%.
Of the world’s major developed economies, only
the US looks (relatively) robust.
Yet its fragile economic recovery is hardly a boon for oil
prices, and may even be bearish for them. Better prospects in
the real US economy will eventually mean the Federal Reserve
ends its quantitative easing programme, knocking out a
pillar of support for the oil and other markets.
Meanwhile, as long as oil prices remain at their lofty
triple-digit levels non-Opec production growth, led by the US,
will remain robust. Opec expects output outside the group to
increase by almost 1 million b/d this year, more than meeting
the expected 800,000 b/d rise in global oil demand.
This is dangerous for Opec. Already, the group expects the
call on its oil this year to be just 29.8 million b/d, 400,000
b/d less than last year.
Next year, demand for its crude could be even lower, believe
some analysts. If Opec’s meeting tomorrow is
expected to be a tame affair, the next one probably