OPEC meeting: How the oil landscape has changed
Last December, as OPEC prepared to meet in Vienna, Bloomberg News reported that analysts it polled had predicted that the oil cartel would leave its production quota unchanged in the face of a growing supply glut. Despite its plans, “falling oil demand and prospects for increased supply from some member states mean the group’s leader, Saudi Arabia, will have to cut production anyway,” Bloomberg predicted. The age of abundance appeared to be upon us.
Six months later, OPEC may have the opposite problem on its hands. Despite December predictions that Saudi Arabia would need to trim its output by one to two million barrels per day (bpd) to prevent a price collapse, the oil kingdom kept its output level in the intervening months, and even slightly increased output to 9.66 million bpd in April from 9.56 million bpd in March.
The group will meet on June 11 in Vienna amid sputtering output among many of its member states and better than expected economic growth in China and the US, the world’s largest oil consumers.
Taken together, global oil markets may be undersupplied for the second half of this year, with analysts now predicting Saudi Arabia may need to lift production substantially to meet demand. Saudi Arabia may need to boost output to somewhere between 10.2 and 11 million bpd to prevent prices from spiking, but the Bloomberg survey suggested analysts question whether or not the world’s largest oil producer can fill the void.
The big difference over the last six months – and why predictions by market watchers have been so off – is that several major oil producing countries have been affected by internal instability or geopolitical upheaval, which has prevented production levels from rising, and in some cases, knocked some output offline. (Related Article: Kurdish Oil Looks For Buyers As Baghdad Warns Them Away)
Libya has been experiencing internal political battles that appeared to be on the verge of resolution earlier this year. Anti-government forces have taken control over oil ports in the east, while the recognized government in Tripoli has denounced any efforts by separatists to export oil as illegal. In April, the two sides appeared to be close to a diplomatic solution that would lead to the resurgence of Libya’s oil sector, which has the potential of producing 1.6 million barrels per day (bpd). The troubled country has been unsuccessful thus far at boosting oil exports and the political struggle between the two sides continues. Libya is now producing less than 200,000 bpd according to recent data.
Iraq, too, has disappointed oil markets. Despite ongoing violence, Iraq has made enormous strides in bringing many of its oil fields online. In recent years, Iraq surpassed Iran to become OPEC’s second largest oil producer, and the government led by Nouri Al-Maliki was aiming to lift oil production to 4 million bpd in 2014. Iraq hit 3.6 million bpd in February – a 35-year high – but since then its output has fallen back by eight percent due to attacks on oil pipelines. It will struggle to meet production expectations through 2014.
An interim deal between Iran and the West lifted hopes at the end of 2013 that Iran would be able to return some of its oil production to market, sending prices downward. Western sanctions have targeted Iran’s oil sector with ruthless efficiency, cutting exports from more than 2.5 million bpd before 2012, down to one million bpd last year.
The thaw in relations since the July, 2013 election of Iranian President Hassan Rouhani -- and the six-month sanctions-easing deal reached last November -- led to speculation that Iran would again become a major oil exporter. Indeed, Iran succeeded in lifting oil exports above 1 million bpd, defying the terms of their deal with the West, but any further increases depend on a comprehensive deal over Iran’s nuclear program, which has thus far proved elusive. The July deadline to reach a deal is quickly approaching and the failure to either secure an agreement or a six-month extension would result in an automatic return to sanctions.
On top of the unexpected troubles facing several OPEC producers, the economies of China and the United States – the two largest oil consumers in the world – have performed much better than was expected only six months ago. The US has finally regained the jobs lost in the financial crisis, and fears over a hard landing for China’s economy have not been borne out by the facts, at least not yet. (Related Article: Safety Concerns Mount As Rail Shipments Of Oil Grow)
So we are back to a scenario in which global oil markets are tight once again, even with Saudi Arabia maintaining elevated production. At the upcoming Vienna meeting, OPEC is expected to leave its output quota unchanged, and any increase in production would need to come from the cartel’s largest producer. Saudi Arabia, as the only holder of significant spare oil capacity, stands alone as a source for additional supplies the world may need for the remainder of the year. But while dipping into Saudi Arabia’s spare capacity – which stood at only 1.96 million bpd in the first quarter – could provide short-term relief, it would also leave the markets increasingly vulnerable to a supply disruption.
Six months ago it appeared we were entering a period of a supply glut, but oil markets have suddenly tightened, even though Saudi Arabia decided not to cut production. Unless other OPEC members pick up the slack, oil prices could climb higher in the latter half of this year.
