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 humdinger.
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 1980 ($95.68/b).
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
in April, according to Opec, was barely above
Iraq’s third quarter 2012 average.
Second, although 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 helpful buffer.
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 Libya and 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
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 1m 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 29.8m 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