Some Thoughts On The Oil Market And OPEC

By Win Thin

Oil prices are lower today despite Saudi comments that it is cutting output because the market is oversupplied. Saudi Oil Minister al-Naimi said that his nation cut output to 8.29 bbl/day in March from 9.13 mln bbl/day in February, and that April output might be “a little higher” than March. Kuwaiti Oil Minister said that OPEC has produced enough oil to make up for the Libyan shortfall, and the “oversupply” claim was the single biggest theme to emerge from all the producing countries that are attending the Kuwait meeting of the Asian Energy Ministerial Roundtable, which includes officials from OPEC, Asia and Middle East. To us, it is a pretty strong statement that Saudi Arabia is cutting output even as Brent remains at or near $120 as it’s hard to believe that with Libyan output still deeply affected, that Saudi Arabia would actually remove barrels of oil. At some point, we would expect oil to catch a bid again.

Maybe the oil market is well-supplied right now as claimed, but we think a Saudi cut in production is the wrong move at a time when all markets are very, very nervous. Oil above $120 is simply not the right thing for the global economy. It’s down 5% from the peak of last week, but the longer oil stays high, the more money comes out of consumers’ pockets and the higher the risk of second round price pressures. Indeed, OPEC Secretary General el-Badri warned that oil is likely to stay above $100 until 2012 but blamed speculators. With seasonal gasoline to pick up in the coming months, many oil analysts are expecting increased OPEC (and Saudi) output as we move towards the summer.

Iran officials said OPEC would most likely keep quotas unchanged at the next meeting in June, but we note that actual quotas don’t mean anything right now given cheating of 6-8% above quota that’s been seen since late 2009. However, an announced quota increase would send the strong signal that OPEC does not want oil to remain much above $120 for too long. Quota cuts totaling almost 5 mln bbl/day were announced in Q4 08 as the global crisis deepened, but those quotas have inexplicably remained in place there even as the global economy has recovered. Instead, OPEC has simply tolerated (and perhaps encouraged) quota cheating that in March was an estimated 6% over quotas for OPEC. Just as emergency measures are being removed by policy-makers in EM and DM, so too should those emergency quota cuts be removed as well.