• OPEC curbs may be needed in 2013 as stocks swell up.
• Delegates say Saudi thinks Iraq must contribute to next cut
• Saudi, Iraq fail to make any compromise on secretary-general
• OPEC keeps 30 mbpd production target, meets next May 31
A new competition at the top of OPEC has come out, pitting up-and-coming Iraq against undoubted oil cartel heavyweight Saudi Arabia.
Having overtaken Iran as OPEC’s second largest producer, a revitalized Iraq is beginning to worry Riyadh.
At Wednesday’s meeting of the Organization of the Petroleum Exporting Countries the opening salvos were fired in the tussle over who takes responsibility for cutting production if oil prices, comfortable for now at $109 a barrel, start falling.
OPEC agreed on the retaining of the 30-million barrel-a-day output goal and meet next on May 31, but many market observers think supply restrictions would be required sooner rather than later if producers want to prevent slow global expansion and fast-growing inventories sending prices tumbling.
After 20 years of battle, sanctions and civil conflict that left its oil industry in disorder, Iraq is no mood to consider curtailing production just as it starts to take off.
Iraq’s OPEC Governor Falah Alamri said that Iraq will never cut production. Some countries that have intensified their production in the last two years – they should do so. This is a sovereign issue, not an OPEC issue.
That was a sheer reference to Saudi Arabia, which this summer lifted production to a 30-year high above 10 million barrels a day to prevent oil costs ballooning after Western sanctions on Iran divided its output.
The view from Riyadh, said delegates at the meeting, is that Iraq should contribute to the next round of OPEC supply curbs.
A senior Iraqi official warned that if Saudi pushed that line there would be ‘dark days ahead’ for OPEC, saying Baghdad would not even consider production restraints until 2014.
Every additional barrel that Iraq produces reinforces its confidence and its expectations that higher production is attainable – and it will negotiate on that basis, stated the Iraqi expert Raad Alkadiri of Washington consultancy PFC Energy.
Now OPEC is handling with a much more confident Iraq and Baghdad is looking at regional politics and is less willing to compromise.
Iraq is impervious to arguments. It says that it was subject to sanctions for so longer that it has a free pass to rebuild its economy, said Neil Atkinson, who is the director of energy research at Datamonitor.
Output from OPEC is already down sharply from the highs of the summer when the Saudi surge took the 12-member group to nearly 32 million bpd. Production is November was down to 30.8 million with Saudi easing to 9.5 million.
But OPEC may need to ease further to balance out the market in the first half of next year when, demand depressed by a static economy, its own forecasts point out the needs for OPEC crude will come in at only 29.25 million bpd.
The Algerian Energy Minister, Youcef Yousfi said that they are concerned by the drop in demand and the high level of stocks.
Mr. Atkinson stated that there is rising oil from the places like the United states and Iraqi production is rising quite sharply. There is a risk though, that they see a sharp drop in price next year.
The world’s rapidest growing crude exporter, Iraq experts more gains next year as foreign companies push production towards the highest level ever, Iraqi Oil Minister Abdul-Kareem Luaibi told to the media reporters on 9th December, 2012 ahead of the Vienna meeting.
Output began to rise in earnest in 2010 after Baghdad secured service contracts with companies such as BP, Eni, Exxon Mobil and Royal Dutch Shell.
Flows have now achieves 3.4 billion bpd – up nearly a million bpd from when companies got down to work three years ago.
Luaibi said that the output in 2013is expected to average 3.7 million bpd – just shy of an all-time high of 3.8 million, hit in 1979 with exports running at 2.9 million bpd, including 250, 000 bpd contributed by the semi-autonomous northern Kurdistan Regional government (KRG). While that may be ambitious, 3.5 – 3.6 million appears achievable.
The changing shape of Middle East politics after the U.S. – led defeat of Saddam Hussein in 2003 and the 2011 Arab Spring plays into OPEC dynamics.
Political matters sit behind this rivalry, said PFC’s Alkadiri. Regional alliances are pitting Saudi Arabia, Iran and Iraq against each other.
That was properly illustrated at Wednesday’s meeting by an argument over the appointment of OPEC’s next secretary-general, the group’s public face and the head of its Vienna headquarters.
Iran dropped its nomination to back Iraq’s aspirant against Saudi Arabia but neither Riyadh nor Baghdad would give way and Libya’s Abdullah al-Badri was reappointed for another year.
It is clear that both of the sides view the issue in the context of growing sectarian and regional tension in the Middle East, making the issue even harder to resolve that usual, stated PFC Energy.
FRACKING HEAT ON OPEC
Adding to the heat on OPEC is the dramatic rise in oil production from the United States, urged by hydraulic fracturing, or fracking, of shale reserves.
The U.S. Energy Information Administration said on 11th December that U.S. output will expand to 760,000 bpd in 2012, the quickest pace since commercial oil production began in 1859.
It is clearly something they are looking at very carefully because it is increasing and they expect it will have a severe impact on OPEC producing countries, said Nigerian Oil Minister Diezani Alison-Madueke.
After years outside OPEC’s quota system because of low output, Iraq was brought into the fold a year ago when OPEC set its 30 million bpd aim for all 12 producers. But unlike previous OPEC contracts no individual quotas were assigned.
That suited Saudi Arabia, leaving it free this year to balance out the markets by using its space capability as it saw fit.
But in the event of a build in inventories that hits prices, OPEC may need to restore quotas if it is to impose a credible production cut.
That is likely to prove very difficult, not just because of Iraq but because Iran is very unlikely to accept a quota anywhere near its sanctions-constrained production. Venezuela too could resist a lower quota after disputing independent estimates of its output for years.
Quotas would become a big matter if they see a price drop and then everyone will have to come to the table, said Datamonitor’s Atkinson. That would cause huge problems for Iran and Venezuela.
OPEC can only hope that a tough decision is postponed by a continued stand-off between the Western powers and Iran over Iran’s nuclear program, and the threat of Israeli military action, keeping oil costs high.
That could mean a repeat of 2012, with oil prices supported in 2013 for fear of an invasion on Iran, even if demand is poor and market fundamentals weaken.
Lady luck has been a great help for OPEC, because the macro numbers do not add up to 2012 being a successful year, said oil brokers PVM. She has come in the form of geopolitical tensions and supply doubts which have kept speculative interest in oil lively and stimulated stock building.