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2014-06-05 19:00:00

GOLDILOCKS PERIOD FOR OPEC

GOLDILOCKS PERIOD FOR OPEC

When Opec last met six months ago the discussion in and around its secretariat building in central Vienna centred on how the oil cartel might have to cut production to accommodate rising output from a trio of countries – Iran, Iraq and Libya.

But as oil ministers from the 12 member countries prepare to gather in the Austrian capital for next week's meeting, there is a different talking point. The focus is no longer about reducing production but whether Opec can pump enough oil to meet the "call", or demand for its crude, given the growing number of problems among its member countries.

"Raising, not limiting output is now the challenge for Opec," says Energy Aspects, a London-based consultancy.

Since Opec's last meeting in December, Libyan exports have slowed further as the security situation in the country has deteriorated, while Iraqi production has increased only marginally and Iran has yet to strike a final bargain with western powers over sanctions.

At the same time, demand for Opec crude has been rising.

Citing stronger demand and disappointing supply from non-Opec countries such as Russia and Kazakhstan, the International Energy Agency, the world's leading energy forecaster, recently increased its 2014 call on Opec crude, saying the cartel would need to significantly increase third-quarter production to balance the market.

"While Opec production gains of around 400,000 b/d went some ways towards easing markets last month, that gain will be insufficient to meet market needs in the second half of the year, when consumption bounces back seasonally," the IEA said in its widely followed monthly report.

Analysts estimate Opec will need to pump at or around 31m b/d in the last six months of 2014, 1m b/d above current levels, to keep prices in check. Brent, the international oil market benchmark, has averaged around $108 a barrel over the past couple of years – close to the "magic" $110 level aimed for by many Opec members.

But it will be a huge task for the group to hike production further because of unplanned outages in several member countries. According to Barclays there is currently around 2.5m b/d of Opec output offline in Libya, Iraq, Iraq and Nigeria.

To get anywhere near 31m b/d, therefore, would require Saudi Arabia, Opec's biggest producer and the only country with significant spare capacity, to pump around 11m b/d a day, according to Amrita Sen, analyst at Energy Aspects. While possible, it would be unprecedented and reduce the market's spare capacity to 1 per cent, she says.

"A volatile ride to the upside [for prices] may well await us this summer," adds Ms Sen.

Other commentators are less concerned, saying the market will draw on stocks if Opec fails to meet the call in the second half of the year. If so, this will lead to a tighter market that will help underpin prices.

"We foresee a slight stock draw accruing over the summer so we don't see any real issue in meeting market demand," says David Wech, managing director at Vienna-based consultants JBC Energy, adding that concerns over low oil inventories in the developed world are overplayed.

Olivier Jakob of Petromatrix, a Swiss consultancy, says: "If you look at the amount of refining capacity that has been taken out in Europe, you cannot compare the stock levels of now with three years ago because in terms of days of cover you don't need the same level of stocks."

Indeed, physical markets are also signalling they are adequately supplied. Several grades of crude, including Russia main export crude, are trading at a steep discount to futures prices.

In part that is a reflection of the pressures facing refiners in Europe. High crude prices and low diesel prices are weighing heavily on margins and refiners are responding by cutting back on production or extending maintenance periods. Analysts reckon refiners in western Europe will cut "runs" sharply this summer.

As such, there is a risk that demand will be weaker than the IEA and other forecasters anticipate, reducing the "call" on Opec.

Energy economist Philip Verleger also expects the pace of growth globally to slow in the second half of the year.

"Growth prospects around the world seem to be softening. People are concerned about the rate of growth in the US. European oil use is up a little while China has problems with its construction sector, so oil use won't grow there. Some of these concerns about whether or not Opec nations will meet supply targets are overblown."

For its part, Opec seems content with the status quo. Both its secretary-general and Saudi Arabia's oil minister have signalled in recent weeks there will be no major policy changes, saying the oil market is well balanced, with enough supply to meet demand, and prices are fair.

"Opec, at least for now, is in a goldilocks period," says Jamie Webster, head of market intelligence at PFC Energy." Prices are high for them but not astronomically high that all of their consumers are desperately looking for other fuel types. And the whole issue of US shale . . . is easier for them to handle because of the problems in Libya, Iran and Nigeria and some of the non-Opec producers."

ft.com

Tags: OPEC, OIL, RUSSIA

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