OPEC set for no change, oil price holds the key

Friday 4th December 2009

Simon Webb and Barbara Lewis

OPEC is expected to hold output steady when it meets in Luanda at the end of this month, rounding off a year of stable production policy and of robust oil prices.

Oil inventories are brimming and any recovery in demand is expected to be slow, but international benchmark U.S. crude futures have more than doubled from just above $32 a barrel last December to above $76 now - roughly the level OPEC has said is high enough for producers and not too high for the still delicate world economy.

"The oil price has not been the cause of surprise for us for some time, so there is really no need for OPEC to surprise the oil market," one OPEC delegate told Reuters.

More comments were expected this weekend at a meeting of the Organisation of Arab Petroleum Exporting
Countries in Cairo on Saturday, but no formal decision on output policy is expected until the 12 members of OPEC meet on December 22 in Luanda.

When the Organisation of the Petroleum Exporting Countries last met in September, Saudi Oil Minister Ali al-Naimi told reporters the market was supported by expectations of economic growth and able to ignore excess supply.

That meant the group could keep output policy officially unchanged, as it has done ever since last December's announcement of a record cut of 4.2 million barrels per day.

In an interview shortly after the September meeting, Naimi went so far as to predict there would be no need to change output targets for all of 2010 on the basis of supply and demand forecasts then available.

"I think they are comfortable with where prices are now. I don't think anybody is suggesting this is justification for a rise in supply. Equally, they're not too worried right now about fundamentals," said David Kirsch, director of market intelligence at PFC Energy in Washington.

Unofficially moving targets
The only change this year has been decreasing compliance with OPEC's output targets.

As prices have recovered from the December 2008 fall to the lowest in nearly five years, OPEC's discipline has gradually slipped from historic highs of around 80 percent in April and May to only around 60 percent of agreed curbs now.

Provided the group does not spring any surprises in Luanda, at a meeting hosted by the current OPEC president Angola, this would be the longest period of steady output policy since 2005-6.

Then oil prices had faltered to around $60 a barrel, but a long-term bull-run, begun around 2002 was still essentially intact.

The rally ended with last year's record price spike to nearly $150 a barrel in July, followed by the economic crisis.

Fundamentals versus speculation
Now, some analysts argue, OPEC could face further price falls if it does nothing in view of inventory levels well above historic averages and the prospect of a seasonal fall in demand in the second quarter of next year.

Another view is that prices have been remarkably resistant given historically high levels of inventory. The implication is there is speculation in the market and OPEC should raise output levels if it wants to cap price gains that could destroy demand in a still difficult economic context.

Already leading exporter Saudi Arabia increased its supplies to some regular customers in December, industry sources said, although Kirsch estimated the increase was probably only around 150,000 bpd.

"Given that Saudi Arabia has already started to leak a bit more crude oil and has sent repetitive comments that it would not allow the market to run away higher, we will not exclude the scenario of an increase in the official quota at the next meeting," said Olivier Jakob of Petromatrix.

The backdrop of Copenhagen climate change talks December 7-18 has highlighted the risk to OPEC of a global drift away from fossil fuels and the Dubai debt crisis, right at the heart of the core oil-producing region, has served as a reminder of the continuing weakness of the global economy.

In an interview with reporters, OPEC Secretary General Abdullah al-Badri said OPEC would have to tread carefully at the December meeting.

"OPEC's policy decisions throughout 2009 have clearly demonstrated our commitment to the global economy and assisting in its recovery," Badri said.

He also noted the high levels of inventory. In addition to brimming stocks on land, he estimated a massive 165 million barrels of crude oil and refined products were floating in vessels at sea.

"They (OPEC members) don't feel that fundamentals are driving it up, so if they put more oil in the market now what good would that do?" said Kirsch of PFC Energy.

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