Opec calm, but problems await as oil prices remain high
Tomorrow's meeting looks set to be quiet, but that doesn't mean all is well for the cartel
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 break even.
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 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 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 won’t be.