Global Insight Perspective | |
Significance | The clamour of divergent voices within the producer body seems to be lessening, with key states coming out in favour of a "wait and see" policy or a small delayed cut, as oil prices hold above the increasingly significant US$60/b level. |
Implications | The price climate, supported by falling consumer stock figures, provides a last-minute argument in favour of inaction, although inadequate compliance with the November cut will certainly be addressed, with production coming in over half a million barrels above quota. |
Outlook | OPEC members are becoming increasing attached to oil prices above the US$60/b level, despite protestations to the contrary. This means that a further interim meeting in January cannot be ruled out, even if producers decide to stave off further action today. |
Defence of the Price
As members of OPEC prepared to meet in the Nigerian capital, Abuja, the clamour of pre-meet voices seems to have become increasingly harmonious in recent days, suggesting that a significant cut in production remains off the cards for the time being.
Nevertheless, oil markets have risen in anticipation of the outcome of today's OPEC meeting for the last two days, gaining 63 cents today on the benchmark NYMEX contract, which stood at US$62.00/b at 1200 GMT.
Still in favour of cuts are Iran and Venezuela, both of whom have domestic production problems to contend with. However, the Saudi Arabian oil minister's comments that the market is "closer to balance' than it was in October, combined with "let's wait and see" statements from Libya, the United Arab Emirates, and Kuwait, suggest that a quorum against significant action is gaining strength. That could see the group hold off action until a further interim meeting—or agree a small 500,000- b/d cut for February 2007—although enforcement of the previous cutback still represents the most obvious course.
Latest figures from the Energy Information Administration (EIA) suggest that group compliance with the November production cut of 1.2 million b/d is patchy, with production coming in some 665,000 b/d higher than the 26.3 million b/d agreed (see World: 13 December 2006: OPEC Overproduction Registered but Ministers Err Towards Inaction on Further Cuts). Further last-minute arguments against additional action were put forward by U.S. stock figures yesterday, which showed a 4.3-million-barrel weekly decline in crude levels to 335.4 million barrels and a 500,000-barrel fall in distillates to 131.9 million barrels. Meanwhile, the International Energy Agency (IEA), estimated that industry stockpiles in its member countries had fallen back by 40 million barrels in October.
Outlook and Implications
With prices remaining above US$60/b and compliance still wanting on the previous quota cut, OPEC members have few reasons for further immediate action, other than fear that inaction will leave oil prices to drift into the mid-US$50s/b, which proved so unpalatable to members in October. One thing that is clear from recent statements is the number of producers who have set their budgetary sights, if not officially then unofficially, on gaining oil prices in the US$60/b range, a point which is likely to guide quota decisions going forward.
However, with the northern hemisphere winter still upon us and consumer stocks falling, the political fallout from immediate cuts would likely be unpalatable for most, making a small delayed cut or a roll-over the most likely outcome from today's meeting. Also on the agenda will be the falling value of the U.S. dollar, which has made purchasing power a concern in OPEC states, and the Secretary-General position, which is expected to be awarded to the former Libyan National Oil Corp. head, Abdullah al-Badri.
Other points for review include applications for the expansion of the group, with Angola's application backed by Qatar, and Ecuador also apparently interested (see Angola: 13 December 2006: Angola to Apply for OPEC Membership This Week and Ecuador: 14 December 2006: OPEC Welcomes Ecuador Membership).