OPEC Complaining About IEA Release

Jim Brown
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At an annual meeting with the EU on Monday OPEC's president complained the IEA's release of oil from the strategic reserves of 28 countries was "meddling" and contrary to the "free market" principles of the IEA countries.

Since the OPEC cartel was formed to be the exact opposite of a free market in oil that kind of comment would not be unexpected. OPEC was formed to manage exports from producing countries and foster a "fair" price environment for the lifeblood of the global economy. Of course the fair price meant whatever OPEC felt was a fair price nit necessarily what the world thought was fair.

OPEC disrupted its own destiny when if failed to establish a quota at the last meeting in early June. When the committee failed to come to an agreement the quota system basically ended. Every OPEC country is free to produce whatever quantity they want. The greed of six OPEC countries constantly pushing for higher prices broke the formal agreement between all 12 OPEC countries to honor the quota system.

At the EU talks on Monday the OPEC president continued to complain the market was well supplied and there was no need to release extra oil into the market for only the third time in the IEA's history. The annual meeting between the EU and OPEC began in 2005 and normally covers topics like speculation, demand expectations and supply security.

The OPEC president this year just happens to be from Iran. The oil minister from each OPEC country serves a rotating one-year term as president. Many reports claim the Iran presidency this year was the reason OPEC could not come to a quota agreement because the Iran official, Mohammad Aliabadi, refused to allow an agreement as a political message in response to the nuclear sanctions against Iran. Aliabadi claims the IEA release was political in nature and not based on an actual shortage of oil.

Iran is not alone in this view. Analysts around the world have noted there was a very prevalent economic element in the release. The IEA claims it was trying to prevent higher fuel prices from knocking the global economy back into a recession. Aliabadi pointed out that prices had already fallen significantly from their May highs and at $113 for Brent they were definitely not showing a pending crisis in supply.

If the IEA was concerned about high prices crippling the global economy why didn't they act when Brent was $125 in May and WTI at $115. Why wait to act until prices were more than $10 off their highs if it was not a political event?

Analysts reviewing the impact of the OPEC meeting believe Aliabadi and the Iranian presidency for 2012 has hijacked OPEC for political reasons and was trying to use the quota system as a political tool to punish the U.S. and western nations for the Iranian sanctions. They claim OPEC may be impotent for the rest of the year until the presidency passes to the next country.

With Saudi Arabia and Iran constant enemies this was an opportunity for Iran to stick it to Saudi in the OPEC forum. Unfortunately for Iran it did not work out well and now with no quota Saudi and others can pump whatever they want. Apparently the U.S. and the IEA also wanted to remind Iran they also have the power to cause Iran pain with the oil release announcement.

You may have heard over the weekend the U.S. announced it was reviewing Venezuela for sanctions because they were shipping refined products to Iran in violation of the U.N. nuclear sanctions. If the U.S. put sanctions on Venezuela that would halt their export to us of 1.0 mbpd of crude and that would seriously cripple Chavez and his election efforts because he uses the government money for his own purposes. Reportedly Venezuela has not shipped any gasoline to Iran in the last several weeks since the Iranian sanctions were tightened. Evidently Chavez does not want to risk losing his U.S income source. The new U.S. announcement over the weekend was probably more of a warning for Iran than a warning for Venezuela.

I believe OPEC made a tactical error at the June meeting and whether it was cause by Aliabadi or not the result was the same. The U.S. and the IEA nations have the ability at least in the short term to impact prices. OPEC had the same ability before the meeting and could have chosen how to manipulate them after the meeting had they made the right decisions and said the right things. Saying "we feel your pain and we are going to up the quota by 1.5 mbpd to cover the shortfall" would have left them in control and kept prices about where they were when the meeting started. Since OPEC was already producing more than 2.0 mbpd over quota and they knew Saudi was going to increase by 1.2 mbpd the announcement would have been their opportunity to control the spin and same their image. Instead they are now portrayed as a broken organization with everyone doing their own thing. Secondly they are now getting $15 a barrel less for their oil. Sounds like a lose-lose situation for them. Way to play those presidential cards Mr Aliabadi!

Jim Brown

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