OPEC Stresses Commitment To Supply, Watches For Developments

www.menafn.com Middle East Economic Survey - 17/03/2003

Walid Khadduri and Bill Farren-Price of MEES report on the OPEC Ministerial Conference held in Vienna on 11 March.

OPEC ministers meeting in Vienna on 11 March agreed to maintain present oil production levels and reiterated their collective commitment to supplying global markets as required in an effort to bring stability to oil prices. In a communiqué issued at the conclusion of the ordinary ministerial meeting, OPEC said its decision was motivated by the view that present oil supplies were adequate to meet current market requirements, after taking into account the supply/demand picture for the first and second quarters. The organization said it continued to watch geopolitical developments closely and underlined its readiness to supply the market as required. Ministers welcomed the return of Venezuelan production but insisted that while cold weather and low OECD stocks had contributed to high prices so far in 2003, "the current high price levels above the OPEC price band are predominantly a reflection of uncertainties resulting from prevailing geopolitical tensions." Ministers announced plans for an extraordinary meeting in Doha on 11 June and a subsequent ordinary meeting to be held in Vienna on 24 September.

While there was no mention of Iraq in the final communiqué - marking the desire of ministers to avoid signalling that policy was being formed in expectation of military conflict against a member state - the opening speech by OPEC President and Qatari Oil Minister 'Abd Allah al-'Attiyah was more specific on this count. He said that the Iraq crisis had reduced OPEC's influence on oil prices, even though the group's output decithough the group's output decisions in January had prevented oil prices from even greater rises. Mr 'Attiyah stressed that OPEC was ready to respond to any change in market conditions, whether by bringing remaining group production capacity on-stream in the event of fresh supply disruption or by cutting production should the market become oversupplied in the second quarter as a result of the seasonal drop in global demand and the continued resumption of Venezuelan production.

The ministerial meeting itself, which was not attended by either the Kuwaiti or Iraqi oil ministers, dealt with nominations for the post of OPEC Secretary General, which will become vacant at the end of the year. Ministers also discussed nominations for the post of Secretary General of the International Energy Forum, which is being established in a permanent secretariat in Riyadh. Nominations for the post have been submitted by Norway, Mexico and Italy. Delegations representing non-OPEC oil producers Angola, Egypt, Mexico, Oman and Russia also met with ministers.

OPEC Close To Full Production Capacity The subtext to OPEC's central commitment to keep global markets well supplied was that the group is already producing close to capacity, with only Saudi Arabia and to a much lesser extent several other countries able to mobilize additional production from present levels if required. This was the main reason that the issue of quotas - which are de facto in abeyance during this period - was not a subject for official discussion at the meeting, despite persistent media reports to the contrary. While MEES understands that additional Saudi capacity is being de-mothballed in preparation for use towards the end of March, OPEC's options for substantial new additions to production capacity are now limited. Ministers also now appear resigned to the fact that pure supply fundamentals are no longer sufficient to bring prices back down towards OPEC's preferred $22-28/B price band. In comments made ahead of the ministerial meeting Saudi Oil Minister Ali Naimi conceded that the only way to bring prices down was "to eliminate the drums of war". This point was also made by UAE Oil Minister Obaid al-Nasseri, who pointed to the fact that OPEC had added 3mn b/d of production in the last two months. "This will take care of the market for the time being," he said.

In recent bilateral meetings, OPEC ministers and officials appear to have extracted a commitment from the IEA and the US that the organization will be given the opportunity to address any fresh supply problems - in the event of a war with Iraq - before strategic stocks are released. However, on several recent occasions, OPEC has indicated that it has already proved its commitment to market stability, through its swift ramp-up of production in late 2002 and in January this year, and that any fresh requirement for supply will have to be met by a release of strategic reserves.

Three of the key players in this discussion - Mr Naimi, US Energy Secretary Abraham Spencer and the newly-appointed Executive Director of the IEA Claude Mandil - have all held bilateral meetings in recent days to reiterate their common understanding on this point. At their meeting in Riyadh on 5 March, Mr Naimi and Mr Mandil conveyed their agreement on the use of reserves only after producers had been given an opportunity to address a supply shortfall (MEES, 10 March). Meeting in Brussels on 7 March, Mr Mandil and Mr Abraham stressed their appreciation of producer action already taken to stabilize markets. "The US Government and IEA appreciate the actions of producer nations, which have already increased production to mitigate the effects of the Venezuelan disruption. In light of tight markets, we also appreciate producers' willingness to increase production if necessary to address any further supply disruption," they said in a joint statement, adding that they were committed to ongoing close consultations with producers and would "make additional volumes of oil available to the market to reinforce producers' efforts if needed." After a brief meeting with the Saudi delegation in Vienna, Mr Abraham reiterated US policy that its Strategic Petroleum Reserve would only be tapped if there was a serious supply disruption. He said that he viewed OPEC's commitment to supply the market as positive and added: "We view the reserves as a backstop, an emergency capability to deal with severe supply disruptions."

Supply Scenarios Present Distinct Challenges For OPEC Yet privately, OPEC officials are more concerned about the need to manage the downside pressures on oil prices as they are likely to emerge in the coming weeks and months. A number of possible scenarios each present the organization with different challenges and potential solutions. The first scenario, thought to be the least likely but most benign, would see Saddam Husain step down or be removed internally, short-circuiting US plans for military action. Under this scenario, the war premium would be expected to disappear very swiftly, requiring OPEC to reduce production immediately in order to prevent oversupply and a resulting crash in prices.

A much more likely scenario, under which military action against Iraq is delayed through into 2Q would see the war premium, estimated at $4-6/B, continue, with increased volatility as markets remain under the influence of news headlines. A third scenario sees military action closing Iraqi production for a few weeks if not months. The assumption here is that US forces would need some time to establish security in the country and subsequently mobilize the tens of thousands of Iraqi oil employees. This also assumes vessel nominations and market operations would proceed smoothly enough to provide confidence to customers of Iraqi crudes. OPEC would take up the slack as much as able and reiterate its assurances of supplying the market as needed. Under this scenario, MEES understands that ministers would be unlikely to feel the need to meet until the Doha meeting, where they would be able to take stock of the situation. Certainly, there is a desire among members to avoid politicising what is already a very sensitive situation - which would likely be the effect of an emergency meeting held while any attack on Iraq was underway. This third scenario, if coupled with a continuation of Venezuela's increase in production, would probably require some reduction in group output into 2Q in order to address the seasonal drop in demand. Clearly, further variables to all three basic scenarios - including the precarious state of the global economy - will make OPEC's task in devising appropriate policy responses all the more difficult.

Overall 1Mn B/D Implied Stockbuild In 1Q MEES understands that while the supply/demand balance in January was tight due to the Venezuelan strike, cold weather and US fuel substitution, February and March have seen the market well supplied to the extent that buyers have turned away some extra Gulf cargoes. Moreover, based on initial data for March production and demand, the balance has produced an average contra-seasonal stockbuild of some 1mn b/d in 1Q. According to MEES soundings, OPEC estimated average production of 27mn b/d in 1Q is at least 1mn b/d above the call on OPEC crude in the period, estimated at just less than 26mn b/d. This implied stockbuild has been most pronounced towards the end of the quarter as OPEC production has risen and is expected to start showing up in US stocks data over the coming two to three weeks. For 2Q, the call on OPEC crude is expected to fall to 23-24mn b/d, which on current OPEC production rates would produce an implied stock build of around 4mn b/d. This level of stockbuilding would pressure prices if there was no threat to Iraqi production, since it is well above the more normal seasonal stockbuild of 1.0-1.5mn b/d in 2Q. However, if Iraqi production of some 2.7mn b/d is taken out of the market during the second quarter, then the surplus to call is in line with the seasonal average. Obviously, if Iraqi production continues unhindered, then member states will have to alter their present flat-out production policies and OPEC will have to review its current production ceiling.