The G8 is preparing to demand a dramatic increase in oil production from OPEC as both blocs conduct important meetings this weekend. However, the failure of two key G8 members (which will go unnamed) to establish security in Iraq may make any effort the Saudis take to be in vain.
Iraq's oil exports fell by nearly 1m barrels a day last week after its southern oil pipeline was bombed on May 8. The loss was substantially greater than the 400,000 b/d drop reported by Iraqi oil officials last week and is likely to drive already-high world oil prices higher yet. The loss was in part also due to technical problems at Iraq's northern export pipeline.Internal OPEC politics are likely to make the big OPEC meeting on June 3 a real fight. The Saudis have the luxury of looking to the long term. They can afford lower prices are are keen to achieve them in order to appease the North while keeping it dependent on Middle Eastern oil. Other OPEC members like Indonesia are more worried about short-term problems which high prices will help address. For example, Indonesia became a net importer of crude oil for the first time earlier this year, and a long dearth of foreign investment into its oil fields means status as a net oil importer may be more than just a temporary bump in the road. High prices help the Indonesians boost their declining current revenues while at the same time help attract investment to its oil fields, thus ensuring future production. Combine this with statements from the likes of Indonesia, Nigeria and Venezuela that the famous $22-28/barrel price band needs to be dramatically revised upwards, and you get an OPEC which the Saudis cannot simply push around at will.
"This is way bigger than people had been expecting. It is not fully known in the market and is bullish in the medium term," said Neil McMahon, analyst at Sanford Bernstein.
"The reduction of 1m barrels a day in Iraqi exports effectively nearly wipes out any Opec increase we could get."
High global oil demand means the smaller OPEC members have a stronger hand to play than in a period of weak demand making serious restrictions of supply necessary. Surely the Saudis will push some quota increase through, either this weekend in Amsterdam or next weekend in Beirut. I doubt it will cast away the fears that are driving what some claim is an extra $8/barrel into global oil prices, however.