DAMMAM, 14 September 2007 — With consumer sentiment already on edge and the traditional rise in crude demand in the fourth quarter to meet the seasonal demand for heating fuel, the 145th OPEC meet in Vienna finally decided to increase output by another 500,000 barrels a day from the start of November — despite strong resistance from within.
The decision on Tuesday was reached after an unusually long day of arguments about the size and timing of the production increase. It took the participants seven arduous hours to reach the conclusion — indicating the heat inside the meeting room.
Speculation about the OPEC output decision continued until the decision was announced. Saudi Arabia kept its cards close to its chest until the last moment. While virtually all the stakeholders were expressing their views in public, even before the meeting, Riyadh interestingly kept complete public silence over the issue.
Crude output ceiling is always a sensitive issue, especially in an environment when prices are flirting almost with the $80 per barrel mark. Any word, any move from OPEC thus had profound ramifications.
Within OPEC, there were conflicting voices. There were pushes and pulls in diametrically opposite directions. All this had to be accounted for before making any public pronouncement. Responsibility commanded well-thought-out moves.
While it was being said virtually all around that Saudi Arabia favored increasing the output so as to give a soothing signal to the turbulent markets, there were others — namely Iran, Algeria, Nigeria and Venezuela — who were reiterating their stances against raising output. Some insisted that there was enough crude in the market and reasons other than the supply side of the balance were responsible for current market woes.
This was evident in the opening speeches of some of the ministers in Vienna too. The Iranian Caretaker Oil Minister Gholam Hossein Nozari re-emphasized that OPEC should not be blamed for the current problems in the world markets. The economic situation does not only depend on OPEC’s decision, but many factors, including the capacity of refineries, he added.
Algerian Oil Minister Chakib Khelil said earlier that OPEC should be wary of repeating the “wrong decision” it made in late 1997 at a meeting in Jakarta when it boosted output just before the Asian economic crisis curbed oil demand, leading to a price slump to $10 a barrel.
Even OPEC President and UAE Oil Minister Mohammad Bin Dhaen Al-Hamli was cautious, saying world’s refinery bottlenecks, geopolitical factors and disruption in crude supply are to blame for high oil prices, not OPEC’s policies.
The issue of demand uncertainty was also on the minds of the OPEC ministers. They could not have rocked the very boat they were sailing on by opening the taps in an environment where the demand may appear to be slippery. In recent months, fears that defaults in the US sub-prime sector would spill over into the wider economy and trigger a global credit crunch have raised concerns about the energy demand taking a hit. Equity market weakness has also sparked several rashes of risk aversion as traders fled from commodities, often seen as risky assets, toward safer bets. The OPEC president also underlined this in his opening address saying there were “continuing uncertainties about the world oil demand outlook, exacerbated recently by financial markets turmoil.”
Reaching consensus in these circumstances must not have been easy and striving for a conclusion acceptable to all the major stakeholders at least within — if not without — required deft behind-the-door diplomacy, one has to concede. This is exactly what seems to have been done, behind closed doors in Vienna last Tuesday.
When OPEC finally consented to increase oil production, it was for the first time in more than a year. The new OPEC output target was thus raised to 27.2 million barrels a day.
The change in OPEC output ceiling was a surprise too, in some senses. Twenty-three oil traders and analysts surveyed by Bloomberg News last week said they expected OPEC to leave its target unchanged. Yet this happened!
But OPEC decision had its skeptics too. Some said the change in output would have little impact on the demand-supply balance as OPEC was already pumping more than their quotas allowed. The 10 members with quotas produced 26.71 million barrels of crude a day last month, according to Bloomberg estimates. That meant they were pumping 900,000 barrels a day more than their previous collective target.
Similarly some said that the possible extra OPEC crude would be offset by planned maintenance on United Arab Emirates oilfields in late October and November. The UAE, the world’s sixth largest producer, has work scheduled at three of its largest oilfields that is expected to cut output by 810,000 barrels per day at its peak in November, industry sources underline.
Falah Al-Jibury, an adviser to the Iraqi Oil Ministry, said in an interview in Vienna that the OPEC ministers had three options. The first was to keep production quotas unchanged; the second was to increase by 500,000 barrels a day; and the third was to raise production by as much as one million bpd.
It seems now that the conservatives within OPEC, very much in line with the character of the organization, carried the day and the cartel ultimately opted for the middle path — striving to give right signals to the consuming world and at the same time ensuring not to go overboard in their zeal to soothe the jittery markets.
The big question now and still to be answered is, if this additional OPEC crude will make a difference? Let’s wait and see, but if things like the Mexico pipeline bombings continue to happen, things may already be beyond OPEC’s control.