Interpreting Opec

Every few months, as another Opec meeting rolls into view, a flurry of stories about comments from member states makes its way into the news.

Any time a journalist gets near an Opec member’s oil minister, they pop the question about what the next decision on production quotas might be.  Ministers usually oblige with some sort of reply, either about their own views on what Opec policy should be, or what they think the cartel will actually decide.

My colleagues Carola Hoyos and Javier Blas, who’ve been to dozens of Opec meetings between them, generally pay little attention. All those comments in the preceding weeks count for nothing in the meeting itself, which is when the ministers thrash out a decision. Some of the comments are deliberate red herrings. Other times, they just reflect the country’s position within Opec.

Saudi oil minister Ali al-Naimi, however, is a slightly different kettle of fish. Members take turns holding the presidency of Opec, but Naimi is its de facto chief, because his country not only holds the biggest oil producing capacity but is the most enthusiastic Opec member – it adheres to quota reductions and sometimes even takes a bigger share of reductions, to offset the effect of those members who ‘cheat’ and produce above their quota levels.

Saudi Arabia is also a big swing producer – in otherwords, it tries to keep a significant amount of spare capacity. At the moment it says it has in the region of 2m barrels per day of spare capacity, and another 2.5m in development.

Morgan Downey says however Saudi’s case has been weakened by last year’s oil price spike. This is his guide to speaking Opec:

OPEC: Speculators are causing higher prices.
Means: OPEC wants, needs and causes higher prices by cutting output and creating an oil supply deficit. OPEC is the only group of oil producers with spare production capacity and has co-ordinated control of over 40% of global oil output – currently worth around US$3 billion per day, or US$90 billion per month.

OPEC: We think prices at US$70-US$80 are fair.
Means: OPEC will not increase oil production until oil trades above US$90 per barrel. OPEC members’ target is US$70-$80, which means OPEC will increase production when oil trades above this range (perhaps to US$85-$95) to allow for some slippage. OPEC members do not want to encourage consumer efficiency or risk another recession with US$100+ oil, which is a psychologically important level for oil consumers.

OPEC: We cannot find buyers for our oil.
Means: OPEC members almost can’t believe consumers are buying this line…but it actually worked when oil traded above US$100 last year because OPEC members had run out of spare capacity and were unable increase production.

OPEC: We do not want to increase production while OECD inventories are at record highs.
Means: Don’t look at non-OECD inventories which are falling due to rapid demand growth in the developing world. Why do you think oil has risen from US$32 to US$80 over the past 10 months? If OPEC can keep consumers focussed on OECD inventories this allows OPEC to blame speculators and say “OECD inventories are high…it can only be speculators bidding oil prices up.”

OPEC: Floating storage of oil is at record highs.
Means: It used to be that floating tankers were expensive and only used for storage when land-based tanks were full. Now these floating tanker owners are in such a bad way with a glut of tankers available that they are directly competing with land-based storage even though there is plenty of land based storage available. OPEC needs to point to any full barrel or container as an excuse not to increase production.

OPEC: We have almost 6 million bpd spare capacity.
Means: OPEC members have 2.5 million barrels per day (bpd) of spare capacity. The global oil consumer called OPEC members’ stated spare capacity bluff in 2008.

Related links:

Oil demand peaksin the developed world, but natural gas comes into play (FT Energy Source, 27/10/09)
More gloom about oil prices and the recovery (FT Energy Source, 27/10/09)
Opec still has storage concerns (FT Energy Source)

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