Thursday, June 03, 2004

OPEC speaks, and markets are not impressed.

Today OPEC formally announced it would increase quotas by 2 million barrels/day beginning July 1, adding another 500,000 barrels/day on August 1. That meets the expectations of 2.5 million, but in a staged rather than immediate increase. New York crude prices inched up above $40/barrel in response.

The FT gets to the heart of the matter.
The increase, which will reflect Opec�s current production rates, provides diplomatic cover for Saudi Arabia, Kuwait and the United Arab Emirates to pump more oil onto the market in a desperate attempt to cool the soaring oil price.
It is accepted now that OPEC does not really respect its quotas. The formality of raising quotas today to 26 million barrels/day means that actually OPEC will be pumping more than that. But data suggests the cartel can't go above 28 million -- that is its maximum capacity. The increase puts both Kuwait and UAE at maximum production, leaving Saudi Arabia as the only player left to tinker with prices via spare capacity. Saudi Arabian Oil Minister Ali al-Naimi confirmed he was pumping up to 9.1 million barrels/day; according to the US Department of Energy, the Saudis maximum capacity is 10-10.5 million.

New poster "Pro-Growth Liberal" over at AngryBear has criticized Saudi Arabia for failing to push its own production pedal to the metal (or really, has ridiculed Bush for failing to get Prince Bandar to do this). But think about it. If even the Saudis go to full capacity, functionally that means the end of all OPEC quotas altogether. Saudi Arabia's fear is, of course, the functional end of OPEC itself in such a circumstance. It's plenty easy to loosen your belt after gorging on that Super Sized Extra Value Meal, and precious hard to cinch it up again for the summer swimsuit season. Best not to gorge in the first place.

Details from OPEC's Beirut meeting show that Iran pushed a proposal for a dramatically lower increase in production -- just 1.5 million barrels/day. The two-stage increase apparently is a compromise between the Saudis on one side and Iran and Venezuela on the other.

The Saudis are in a tough spot. They need to increase production to nurture the global recovery, but they can't thrown caution to the wind at pump 10 million barrels/day without fatally undermining hard-won OPEC discipline for the foreseeable future. Of course, the OECD countries would love nothing more than to kill off OPEC's power via this "reasonable" request for more production.

There's always the game; and then there's the game within the game.


At 10:30 AM, Blogger geopoliticus said...

Official oil statistics is unreliable. I find the Groppe, Long & Littell reports much more rational.

I read somewhere the Algerians proposed the OPEC quotas to be abolished. When this happens, and is just a matter of time, all hell will break out. Even the "oil analysts" will understand that there is no spare capacity left.


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