By agreeing to roll over its current official output of 25.8 million barrels a day, in Vienna yesterday, the OPEC has clearly indicated its emphasis on enforcing the previously announced output cuts, instead of making new vows. The oil organization voted for stability and continuity rather than turbulence that any pronouncement to the contrary would have generated in the global crude markets in the given circumstances.
The OPEC decision to roll over their current crude output for the quarter was thus very much in line with the expectations of the market - springing no major surprises.
This was despite the fact that in some of its previous outings, OPEC had exhibited a streak for decisions contrary to the market expectations. However, this time round with crude markets hovering around $60 a barrel mark, analysts say OPEC had little room, freedom, rationale and justification for any such decision.
An OPEC advisory panel had earlier also recommended to the ministers that the organization needed to focus on greater compliance with the current quotas. According to some market estimations OPEC was overproducing by about 700,000 barrels per day (bpd). With this in mind, OPEC has still “got room left to cut back within existing quotas” before considering any fresh reductions, some have been underlining.
Thus when ahead of the formal announcement OPEC announcement, an OPEC official told the eagerly awaiting press in Vienna that the ministers have formally agreed to hold current production, none were greatly surprised. “The formal decision was to roll over, as expected, ‘’the unidentified official said. “This is what all the ministers have agreed on.” The head of Libyan oil policy and chief executive of Libya’s National Oil Co., Shukri Ghanem also had told the reporters immediately after a breakfast meeting of OPEC ministers in the morning, “all ministers are in agreement” on keeping current agreement on output levels.
Saudi Arabia had also fully endorsed such a decision. In comments given to a newspaper, Minister of Petroleum and Mineral Resources Ali Al-Naimi said, the “markets are comfortable, stocks are comfortable, so there is no need to change production,” adding that two cutbacks during the past four months were “good and appropriate” decisions.
While it is difficult to say ‘on record’ and with authority what actually transpired at the ministerial moot, behind the closed doors. However, indications are that before reaching a final decision on the issue, the ministers must also have reviewed the latest demand, supply and inventory data - including a monthly oil market report from the Paris-based International Energy Agency. Many here though underline that with only about half of OPEC’s previous output cut pledges fully implemented, there must have been emphasis behind the closed doors during the OPEC ministerial moot yesterday, to enforce the earlier commitments in this regard.
At its last two meetings in October and December last year, OPEC agreed to cut output by a total of 1.7 million bpd, although most outside estimates indicate organization members have only cut by around 1 million bpd to date.
OPEC’s campaign to boost oil prices by constraining supply has worked - to this point. However, there are people who say the organization will soon have to begin pumping more crude. The omens, some analysts argued, suggest OPEC will need to start increasing output in a few months to avoid choking the world economy. OPEC members “have already reached their goal of wiping out a large part of excess inventories and stabilizing prices,” said Vera de Ladoucette, director of Middle East Research at Cambridge Energy Research Associates in Paris.
Analysts reckon OPEC’s ministers are likely to wait until oil-inventory data for the first few months of this year are published in coming months to confirm what the industry suspects - that inventories are close to becoming so lean that the market is prone to a renewed price surge.
Since OPEC’s cuts, inventories in consumer hands have been falling fast. Last month, the IEA reported that commercial stockpiles in its 26 member countries in North America, Europe and Asia fell by 93 million barrels in the fourth quarter, to 2.674 billion barrels at the end of December.
The data from the US Energy Department last week showed that inventories in the US alone had fallen by more than 100 million barrels since the start of October.
Leo Drollas, deputy director of London’s Center for Global Energy Studies, estimates that global inventories will have fallen nearly 160 million barrels in the six months through the end At the same time, many analysts are lowering expectations of non OPEC growth in oil supply, suggesting the oil exporters’ group may have to make up the shortfall. “There is a danger that they tighten oil markets too much,” said Drollas.
This would have been more true had the OPEC decided to put more squeeze on the markets by announcing fresh output cuts. The oil organization has deliberately avoided any such scenario. It has adopted a more of a wait and watch policy before making its next move on the global energy chess board.