OPEC Talking About Meeting

Jim Brown
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You knew it had to happen. When the price for the basket of OPEC crude dipped below $100 last week the OPEC hardliners immediately started talking about holding a meeting to discuss cutting production.

The Saudi "$75-$85 is a fair price" from a year ago is no longer valid for most OPEC nations. Now we are being told that several OPEC nations will not accept a price below $85 and a dip below $90 would be a reason to hold an emergency production meeting. How quickly they become accustomed to high oil prices.

The OPEC governor of Iran, Muhammad Ali Khatibi, said OPEC should consider an emergency meeting if prices dip below $100. (OPEC basket price which is similar to Brent) "While it is still too early to seriously discuss an emergency meeting we should consider it if prices dip further." The next regularly scheduled meeting is December 14th in Vienna.

OPEC nations are concerned that the return of Libyan production will push prices lower the head of Saudi Aramco disagrees. He said demand is still high and there is no excess in the market. Ali al-Naimi told reporters, "There is no oversupply." Saudi produced 9.39 mbpd in September. That was down from 9.8 mbpd in August but he said the demand was fluctuating and they would continue to supply whatever was needed.

The Kuwait oil minister sees no problem with the current supply-demand mix. "The prices were previously too high and they are still high today." Other countries have started to discuss between themselves after many months of Arab Spring unrest caused them to promise billions in social programs that must be funded through oil sales.

You may remember at the last OPEC meeting the group was divided over production quotas with a group led by the new Iranian oil minister wanting to keep production level while the group led by Saudi Arabia and Kuwait wanted to increase production to keep high oil prices from causing a new global recession. The groups were deadlocked and the meeting ended with no agreement on quotas and the Saudi led group promising to produce whatever the market needed in an effort to restrain prices as Libyan production declined.

Saudi, Kuwait, Qatar and the UAE increased production and a few others probably did so without admitting it in order to capture the high prices for themselves.

The new battle shaping up comes as Libya claims it has restored 390,000 bpd of production and could restore another 600,000 bpd over the next 5-8 months. The hardliners don't want that production to drive down prices.

Iraq and Iran have already made calls for Saudi Arabia to cut back on production. "Saudi Arabia has bypassed all OPEC's agreements and raised its production. Now it must cut back!" This came from Iraq oil minister Abdul Kareem Al Luaiby.

The combined verbal attacks from Iran and Iraq against the largest producer in OPEC are nothing new. Iran and Saudi are basically at war. Saudi wants to keep oil prices in a moderate range or even below moderate as a way to starve Iran and keep them from having enough money to buy weapons and continue their nuclear program. The two countries have been enemies for a very long time. Saudi is buying additional high technology weapons from the U.S. to protect it against a nuclear Iran.

If Iran had two nuclear weapons the first would be used on Israel and the second on Saudi's biggest oil terminal.

OPEC's combined exports for September are expected to be in the range of 30.25 mbpd and up from 30.15 mbpd in August. This would be the highest level in three years. With Saudi production between 9.4 and 9.8 mbpd that means "reported" excess capacity within OPEC is only around 1.0 mbpd and the majority of that from the Gulf producers.

Iraq is attempting to boost capacity to 2.8 mbpd but old infrastructure and sabotage is making it difficult to accomplish. Nigeria is boosting production once again after losing about 1.0 mbpd due to a Niger Delta insurgency. Add in Libya's returning production and we could see an increase in that excess capacity over the next six months. Each of these factors is very unstable and cannot be counted on from day to day.

The battle between Saudi and Iran could be heating up. There was an eruption of violence last week by the disgruntled Shiite majority in Saudi's eastern province. Analysts believe it was instigated by Iran. Saudi and Iran have been increasingly hostile since Saudi sent troops into Bahrain to help the Sunni monarchy crush pro democracy protests by the island kingdom's Shiite majority. That revolution was also instigated by Iran.

Iran is also fighting the U.N. sanctions over its nuclear program and it is finding it increasingly difficult to sell its oil and buy refined products on the open market. If Iran can keep oil prices higher by forcing production cuts or at least arguing for cuts within OPEC then what oil it can sell will be for a higher price.

Saudi has typically been a friend to the USA but after Washington helped throw Egypt's Hosni Mubarak under the bus in the pro democracy uprising they may not be as friendly to the USA as in the past. Saudi is also increasing the volume of oil it sells to Asia and reducing the amount it sells to the West. That can also change its strategic outlook to favor China.

Saudi is no longer the biggest dog in the OPEC yard. In July Venezuela saw OPEC certify its reserves at 296.5 billion barrels and that pushed it over the 264.5 billion claimed by Saudi. Obviously Venezuela is no match for production at 2.3 mbpd but the OPEC pecking ladder is determined by reserves. Venezuela's new status gives it more weight inside OPEC.

Since Venezuela is also a price hawk that gives Iran and Iraq a large partner to help them lobby for higher prices and lower production. The OPEC meetings are going to become significantly more hostile and it will depend on Saudi's will on how the outcome is determined.

Saudi can simply ignore OPEC and pump all they want. They have done it in the past when OPEC members did not agree and tried to force production values on the members to push prices higher. Saudi can control oil prices for the time being by increasing production but their time as the lead dog may be coming to an end. Once they can no longer flood the market with oil their power will fade. Today they have the capability to pump up to 12.5 mbpd if you believe their claims. Unfortunately as much as they struggled to get to 9.8 mbpd throughout this last crisis you have to wonder what their maximum output really is today.

They have boosted their exploration programs significantly but their most active programs are working in fields with heavy sour crude that is hard to sell even for them. Matt Simmons believed they were running out of the easy oil and their major fields were increasingly in decline. By spending billions pursuing the heavy oil it would suggest they did not have any easy oil left to discover.

If the problems in Europe are about over and the U.S. can avoid another recession then oil demand could increase dramatically in 2012. If that were the case the question of OPEC in fighting would cease. Using current maximum production estimates OPEC is only about a year away from a crisis where global crude demand could exceed crude supply. When that happens quotas will no longer matter.

Jim Brown

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