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Opec members meeting will discuss about unpredictable oil demand future

They appear quite content with current oil prices, but measuring energy demand and addressing a decline in output-quota compliance rank as two stiff challenges that members of the Organization of the Petroleum Exporting Countries will confront this week.

Opec members meeting will discuss about unpredictable oil demand future

They appear quite content with current oil prices, but measuring energy demand and addressing a decline in output-quota compliance rank as two stiff challenges that members of the Organization of the Petroleum Exporting Countries will confront this week. The world's major oil producers hold their first meeting of the year Wednesday in Vienna. "Most members are more than happy with current prices and, indeed the sense of stability that's being maintained in the market," said Catherine Hunter, an energy analyst at IHS Global Insight. But compliance with the cartel's production quota has been falling as prices climb, and global demand remains a big uncertainty.

"Compliance in general is low in the 50% to 60% range, which puts the onus on a few actors, including Saudi Arabia, to bear the pain and risks eroding group credibility if prices start to go into reverse," said Hunter. The issue is of such concern that Gulf States and OPEC members from North Africa are "likely to be keen to reinforce this point at the meeting -- and that will probably dominate the agenda," she said. During the Vienna meeting, OPEC members aren't expected to make any changes in the cartel's daily output quota of 24.845 million barrels. No big surprise there: OPEC hasn't changed the quota since December 2008. The current production quota has "served them well," said Hunter.

OPEC's "done a lot of the hard work in arresting the 2008 price slide and removing excess oil from the market since." Maintaining policy stability and consistency, according to Hunter, has stood in contrast to a number of other shifting parameters -- stocks, demand fiscal stimulus packages and wider economic growth. Indeed, OPEC members -- Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela -- have been "realizing prices above budgeted figures while consumers seem to be relatively comfortable too," she said.

That's a big goal OPEC may have already reached -- stability in the oil market and steady delivery of oil supplies to consumers at, arguably, fair and reasonable prices -- but it'll take a lot of work to keep things that way. Oil prices are within the range -- between $70 and $80 a barrel -- that Saudi Arabia has said it prefers, said Kate Dourian, Middle East editor at Platts, the energy- and metals-information unit of McGraw-Hill. "They have fluctuated somewhat, but generally prices have held without too much volatility since the start of the year, and that's exactly how they like it."

"On the one hand, [the $70-to-$80 level] is low enough in order not to burden the still frail economy too much," Ronald-Peter Stoeferle, an oil analyst at Erste Group, said in an annual special report on oil issued last week. "On the other hand, alternative sources such as oil sand or deep-sea oil are not attractive and mostly unprofitable at this level." Accordingly, "the profit margin of OPEC seems robust at this price level" and explains why "we do not expect any imminent changes to the official production policy," he said. Similarly, Todd Hultman, president of DailyFutures.com, said that "with prices at $80, life is good for producers, so there is not much incentive for OPEC to behave differently." And yet they have.

Among OPEC countries, compliance with output quotas, which was responsible for the price stabilization in the first half of 2009, has "fallen rapidly," according to Stoeferle, who pegged quota fulfillment at a rate of just 50%. "This means that OPEC has de facto already increased its production," he said.

Daily output from the 11 OPEC members bound by quotas climbed by 150,000 barrels to a level of 26.76 million barrels in January, according to a Platts survey of OPEC and industry officials and analysts. That means the OPEC-11 were overproducing their target of 24.845 million barrels a day by 1.915 million barrels in January and placed compliance with the current output pact at 54.4%, down from 58% in December, the Platts survey showed.

Patrick Kerr, managing director at Amerifutures Commodities & Options, offered a little history lesson about OPEC. Members, he said, also cheated on their production levels when crude-oil prices touched $10 a barrel in 1999. "If they cheat at $10 per barrel, there is no way you can tell me that OPEC members are not pumping and selling as much as they possibly can right now," Kerr said, pointing out that prices were only knocked back in 2008 because of the subprime-mortgage crisis and global recession. Still, Platts' Dourian argued that "OPEC doesn't have to rock the boat" at the upcoming meeting. "Compliance is not even mentioned in their communiqués despite the fact that most members who can produce more are doing so," she said. "Their production has been creeping [up] as oil prices have recovered, but the overproduction doesn't seem to have dampened prices."

Indirectly or directly, however, compliance will be a big issue with the market still uneasy about its bets for global oil demand. "The big question facing the oil market is world oil demand," said Hultman. "Will demand meet expectations in 2010?" For the first time since 1983, global demand for oil fell two consecutive years -- by 0.3% in 2008 to 85.7 million barrels per day and then by 1.6% to 84.3 million barrels per day for 2009, according to Stoeferle's report. For this year, the U.S. Energy Department expects to see world consumption of 85.5 million barrels a day, according to the agency's latest short-term energy outlook report.

"The world economy has improved and so has the demand for oil," said Sam Subramanian, editor of AlphaProfit Sector Investors' Newsletter. "OPEC, in essence, has been tacitly meeting the higher demand by 'cheating.'" For its part, OPEC's looking for global oil demand to expand by 900,000 barrels a day, a 1.1% growth rate, to an average 85.2 million barrels a day for 2010, according to the cartel's monthly report released Wednesday. "As I see it, there is a good chance that oil demand will fall short of [Energy Department] expectations this year," said Hultman.

"As much as any of us would like the financial crisis of 2008 to be over, it is not. ... Central banks around the world have begun the process of removing monetary stimulus in 2010, so where will the increased demand come from?" he asked. Stoeferle expects demand to "pick up slightly" this year, he said, with the consensus expecting an average increase of 1.4%, or 1.2 million barrels a day. "Basically, consumption has stabilized, but the upswing will be mainly supported by countries outside the OECD, in particular by China," said Stoeferle. The Organization for Economic Cooperation and Development is a group of 30 countries primarily located in Europe and the Western Hemisphere.

Overall, the best growth for OPEC will come from Asia and "somewhat from the developing world," said Byron King, editor of Outstanding Investments and contributor to The Daily Reckoning. And Saudi Arabia has plenty of spare production capacity to meet demand growth. "That $100-plus billion it's spent on oil infrastructure over the past 10 years will pay mighty dividends for a long time," King aid. Still, Iraq's oil production ambitions may offset that as the country reaches greater political and economic stability.

Iraq has been exempt from OPEC quotas since the beginning of the 1990s, but should the nation's output "really be stepped up by 10 million barrels per day, this would come with massive consequences for the market," Stoeferle said. More realistically, Iraq could produce 5 million to 6 million barrels a day by the year 2014 -- a level "considerably more than the maximum production of 3.5 million barrels at the beginning of the 1980s," according to Stoeferle. Negotiations between OPEC and Iraq about bringing the country back into the cartel's oil-output quota system could take place next year, OPEC Secretary-General Abdalla El-Badri said, according to a March 1 report from the Petroleum Economist. "Iraq will produce and export as much oil as it can possibly bring out," said King. So in the end, "OPEC will probably relax its quotas and authorize increased production because they cant' stop it from happening in any case," he said.



Author: Myra P. Saefong


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