Opec’s president says output will not be increased when the group meets in March
By Centre for Global Energy Studies
Posted: 26 February 2008
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Oil prices have exceeded $100 per barrel for more than a solitary headline-grabbing trade, seemingly shrugging off the increasingly gloomy economic news from the world’s largest oil-consuming country and the much-feared slowdown in global oil demand growth.
As the market turns its attention to the forthcoming Opec meeting, fears have increased that Opec will continue with its policy of restricting supplies to keep inventory cover low. This policy was masked somewhat in 2007 by Angola joining the group, but output by the other eleven members dropped last year by 0.67 mbpd, causing global stocks to fall by the same amount.
 A number of factors conspired to push prices above this psychological threshold. Another US refinery was hit by a fire, tropical cyclone Nicholas took a 200,000-bpd bite out of Australian production and Nigeria’s NNPC increased its estimate of shut-in production in the Niger Delta to 1 mbpd.
These physical disruptions have been compounded by uncertainty over the future availability of oil as a result of the rising political tensions between Venezuela and the US, reports of the killing of Nigerian rebel leader Henry Okah while in detention, and a statement from OPEC President Chekib Khelil that output will not increase when the Organisation meets in early March.
All of this has taken place in an environment in which global stockcover is as low as it has ever been and oil demand is still growing strongly in the subsidised markets of Asia and the Middle East, where final consumers have not felt the impact of rising oil prices, while OPEC seems obsessed with the slowdown in the US and the rest of the industrialised world.
Although crude oil stockcover in the US has risen by three days since the beginning of the year, half of this has come from falling refinery throughput as plants enter turnaround. With the US economic outlook remaining weak, oil prices in excess of $100/bbl may not last long, but much will depend on how OPEC views the situation when it meets on the 5th of March. The Organisation’s president has implied that output could be cut, but OPEC may hesitate to take such a step if oil prices remain close to $100/bbl.
As in the past, Saudi Arabia will play a key role at the forthcoming meeting. The CGES has recently calculated that, with production at 9 mbpd, the Kingdom needs an absolute minimum OPEC Basket price of $62/bbl on average in 2008, broadly similar to that required in both 2006 and 2007.
This suggests that the Kingdom will follow a similar policy to that adopted in recent years of adjusting the discounts against benchmark crudes for its export grades to choke off or stimulate demand as required. In this way it has been able to vary production without requiring changes in official quotas.
While the Kingdom may hesitate to support a cut in output quotas in March, it has already begun to tighten the discounts, suggesting it will continue to act quietly to restrict stock building and support oil prices well above the minimum level it needs.
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