September 11, 2007
An Opec supply hike. But from which level?
As the Organisation of the Petroleum Exporting Countries discusses a production increase, as important as the actual volume of the hike is the level from which the increase would take place.
Opec, which controls 40 per cent of global oil production, is discussing a production hike of between 500,000 and 1.0m barrels a day. A 700,000 b/d rise has been suggested as a compromise.
A key question under debate is from which level the increase takes place. That is not an easy subject under Opec’s complicated system of production limits.
In theory, the ten cartel member subject to quotas (Iraq and Angola are excluded) had an official limit of 25.8m b/d. So any increase should start from that point. In practice, however, Opec-10 production is higher that limit, to the tune of 900,000 b/d above according to some calculations. Oversupply, in practice, has eroded more than half the production cut of 1.7m b/d that Opec agreed late last year.
That means that if Opec-10 agrees to increase its production quota by anything less than 900,000 b/d, it would just formalise what is already in the market. Adding, as some analysts, said “comunique barrels” rather than “real barrels”.
However, Opec sources have told the Financial Times in Vienna that ministers were considering to add extra barrels from its current production, rather than from the official quota limit. That would increase the real supply to the market, increasing the dampening impact of the decision on prices.
For that reason, when Opec ministers make their official announcement of production limits, the market will pay close attention not just to the production increase, but also to the level from which it starts.
