BIRD ON OPEC: Is OPEC Raising Ruckus, Output Or Prices?
sg.biz.yahoo.com Sunday January 12, 9:25 PM By David Bird Of DOW JONES NEWSWIRES
VIENNA (Dow Jones)--Is OPEC raising oil output, or just raising a ruckus that will quickly raise oil prices?
As ministers of the Organization of Petroleum Exporting Countries gather here Sunday for an emergency meeting aimed at assuring world markets of adequate oil supplies and sapping the strength from prices, the only thing raised so far has been the level of confusion.
Like the sandstorm that grounded the Libyan oil minister back in Tripoli, it's hard to see how OPEC can get through a political storm with Venezuela and bring out a credible agreement by the end of the day that will calm markets.
"How come you're here?," Saudi Arabia's Oil Minister Ali Naimi joked with a pack of familiar faces in the press corps on his arrival Saturday, noting that oil markets were closed over the weekend.
But the question is best turned back to the minister.
The well-rehearsed Naimi, of course, is before the assembled press to send a message of assurance that OPEC (read Saudi Arabia) won't allow any shortage of crude oil to occur in the market as a result of the 40-plus day Venezuelan strike that has crippled the oil industry.
Sparing crucial details, Naimi seeks to assure the market that, in fact, the Saudis (with a trickle from others) already have boosted output to cover the loss of some 2 million barrels a day of Venezuelan output.
By saying that Saudi Arabia can raise its output to 10 million b/d in two weeks' time, Naimi implies that output is up from the 8 million b/d level estimated in December. Best guess continues to be that the Saudis are near 8.5 million b/d now and may be heading higher. The clear message of a quick move to 10 million b/d - if needed - is meant to preempt a price spike as fears grow of a U.S.-led war with Iraq.
Not Output "Free-For-All," But "Free-For-Some"
Naimi made clear that OPEC's assessment last month that it needs to provide 25.5 million b/d of supply to the market in the near term, including supplies from Iraq, is still valid. Based on December output figures of around 24.9 million b/d, this suggests that about 600,000 b/d of new oil is already on the market from the Saudis, and a trickle from Algeria, Nigeria and the UAE, to cover the cut in Venezuelan output.
While it isn't a production "free-for-all," it's sort of a "free-for-some," as the other members, apart from Saudi Arabia, bring all their spare capacity to the market now, ignoring quotas.
Naimi said he wants to see an oil price "less than what it is today," but wouldn't give a level.
But OPEC will have to avoid falling into a trap of internal politics and the intricacies of its own faulty system of individual output quotas in trying to sell a convincing deal that cools off the market.
The first thing it needs to do to preserve credibility on supply is to deal with the incredible claims of Venezuela.
Many top OPEC officials say they don't put any faith in Venezuela's statement that it will have output fully restored by the end of February.
Before the problems hit in early December, Venezuela's output was near 3 million b/d, but estimates are complete guesses now, with many penciling in anywhere from 400,000 b/d to 800,000 b/d as the current figure.
But OPEC faces a political snag if, in setting short-term output policy, it appears to reject the claim of Hugo Chavez, the embattled Venezuelan president and top OPEC loyalist, of a pending return to normalcy in the oil sector.
Venezuela's Double-Barreled Approach
Chavez has dispatched the two top guns in Venezuela's oil industry, former OPEC Secretary General Ali Rodriguez, now the head of the spluttering state oil company, and Oil Minister Rafael Ramirez, to plead his case. The double-barreled approach of claiming output of an unlikely high volume of barrels was being tried out on Naimi this morning, with the Venezuelans said to be concerned that their barrels are about to be formally and unfairly divided up among the other members.
Despite Naimi's earlier insistence that OPEC wouldn't raise its 23 million b/d ceiling, as this would trigger a price fall, there remains talk that this isn't entirely ruled out, even though it becomes largely an academic matter.
To keep the Venezuelans happy, OPEC may need to give them their pro-rata share of a higher output ceiling, even though everyone knows full well they won't be able to produce to that level. Making the numbers work on paper, if not in reality, is an old OPEC trick, as member countries are loathe to surrender any portion of their quotas because of what it may mean for future quota adjustments.
The preferred approach, a senior delegate said, is essentially to put the Venezuelans aside, recognizing their temporary problems, and acknowledge that the other nine OPEC members with quotas would be pumping to cover the difference between Caracas' real output and its current 2.647 million b/d quota.
This would be on a temporary basis, and up for review at the group's already scheduled March 11 meeting.
The temporary deal - and in fact the de facto output rise already - makes the quota system somewhat moot and is likely to lead to even higher output.
A senior official from a country with little spare production capacity said he believes OPEC could pump as much as 26.5 million b/d in the current environment, or 1.6 million b/d over the December level, without harming prices, given market jitters.
Prices have been well above the top of OPEC's $22-$28 price band and OPEC fears the impact of current high, and potentially higher, prices on the global economy.
Still, OPEC's biggest task will be convincing the market that supply worries should be gone as a result of Sunday's deal, and adding to the price slide of about $1.40, or 4.2%, that came on news of the emergency talks.
"If the market believes there is even one barrel short of 1.5 million (b/d) coming to the market, the price will go up on Monday," the senior official said.
- By David Bird, Dow Jones Newswires; david.bird@dowjones.com
(David Bird is senior energy correspondent for Dow Jones Newswires.)
(BIRD ON OPEC will appear regularly during the course of this week's OPEC meeting.)