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OPEC : The organization was hamstrung by events beyond its control


Crude-oil futures for West Texas Intermediate, the U.S. benchmark, have tumbled 21% since May 1. Brent crude-oil futures, the European benchmark, have fallen 18% over the same span producing at current volumes, the executive said.  

NEW YORK, June 18, 

The ability of the Organization of Petroleum Exporting Countries to influence the oil market was hamstrung last week by its inability to enforce internal production targets and two situations largely beyond its control: the euro-zone debt crisis and looming sanctions against Iran.

The group could do little more than maintain the status quo, though strong opinions about the appropriate level of crude production and an acceptable oil price were voiced. Several members raised the possibility that OPEC may meet again to revise production.

OPEC produces around a third of the world's oil and regulates its production in order to influence global crude prices.

After a closed meeting lasting nearly five hours on Thursday, OPEC reached an accord to maintain its current combined oil production ceiling of 30 million barrels a day for its 12 members.

This level, first agreed to in December, has been consistently violated.

OPEC's agreed output cap "doesn't necessarily have any bearing on the question of actual production," said Tim Evans, an analyst at Citi Futures Perspective. "Whatever language they use in their statement, we'll have to wait for actual data to see how they perform."

Official data submitted by OPEC members put production at almost 33 million barrels a day in April. Estimates by OPEC analysts, using secondary sources of information generally considered more reliable than official country data, put the surplus production at 1.6 million barrels a day in May.

Many OPEC ministers complained about this surplus ahead of the meeting last Thursday.

"We have an overproduction of oil" and Venezuela is worried about the speed at which prices have fallen recently because of this, said Venezuelan Oil Minister Rafael Ramirez.

Crude-oil futures for West Texas Intermediate, the U.S. benchmark, have tumbled 21% since May 1. Brent crude-oil futures, the European benchmark, have fallen 18% over the same span producing at current volumes, the executive said.

Even if OPEC can enforce its production target, the tremendous flux in oil supply and demand makes it virtually impossible to call the right level of output.

The effects of economic uncertainty in Europe and the European and U.S. sanctions on Iranian oil exports that come into effect next month put OPEC's deliberations in a "genuine data fog," said Barclays in a research note.

"The whirlwind that is engulfing Europe…completely overshadows today's OPEC meeting," said David Hufton of oil brokerage PVM.

The meeting saw "the most intensive discussion on…the economic situation in the euro zone," Mr. Ramirez said.

OPEC will monitor the situation closely and may call an extraordinary meeting of the group if the situation deteriorates significantly, he said.

Sanctions on Iran add to the lack of clarity about the true level of OPEC supply. The country's exports are already down significantly—by nearly one million barrels a day, according to the International Energy Agency—but production has been reduced only modestly because Iran has been putting unsold oil into storage, David Fyfe, head of the IEA's oil-market division, said last week.

There is a risk that Iran could be forced in the next month or two to start shutting in between 500,000 and 700,000 barrels a day of its oil production as the European embargo takes effect July 1, Mr. Fyfe said. Iranian oil production is down by around 200,000 barrels a day from around 3.5 million barrels a day at the end of last year due to sanctions, he said.

An even greater reduction is possible stemming from European Union shipping sanctions that could make it very difficult for Asian customers to obtain insurance for cargoes of Iranian oil. This could elevate the total volume of Iranian oil taken off the market to 1.5 million barrels a day, said Barclays, effectively eliminating the current surplus in OPEC production.

"It is an extremely hazardous venture to make a decision on output" now, Barclays said.

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Story by James Herron from Dow Jones. Alexis Flynn and Selina Williams contributed to this column.


The Wall Steet Journal| - June 17, 2012, 2:48 p.m. ET


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