Español

 








Very usefull links



Petroleumworld
Bookstore



Institutional
links


OPEC



 


Petroleumworld
Business Partners

 


IRAQ OIL THE FORUM


Blogspots
recomended

caracas chronicles

Gustavo Coronel

Iran Watch.org

Venezuela Today

Le Blog des
Energies Nouvelles

 

 

 

OPEC : Production cut sooner or later


LONDON
Petroleumworld.com, July 17 2013

For OPEC, the first cut is likely to be the easiest: Kemp

Sooner or later OPEC members will have to reduce output to reflect their reduced share of the global oil market.

The organisation's members must come to terms with diminished demand for their crude as a result of booming shale oil production in North America and strong production growth in several other regions.

The only real questions are how much of the burden of cutting production will fall on Saudi Arabia and whether they will be implemented through the framework of OPEC or unilaterally.

SAUDI FIRST CUT

The first cut, whenever it comes, should be fairly easy. It will probably fall almost entirely on Saudi Arabia and its close allies Kuwait and the United Arab Emirates. Contributions from other OPEC members are likely to be fairly token.

The first cut would merely go some way to reverse Saudi Arabia's increase in market share at the expense of other OPEC members in recent years.

Saudi Arabia's share of OPEC exports has risen sharply as the kingdom has replaced a drop in Iran's oil shipments resulting from sanctions. Output has also fallen in Nigeria and Libya because of production problems, security concerns and increasing competition from North American shale producers.

Other OPEC members will expect Saudi Arabia and its close allies to make all or most of the first round of cutbacks. The kingdom should be able to absorb them without too much impact on its budget.

For this reason, it makes little difference whether the first round of cuts is implemented unilaterally, through quiet adjustments to Saudi Arabia's export volumes, or via an OPEC accord.

The problem is that the first set of cuts is unlikely to be the last. Future rounds will be much harder to agree upon as members differ over how to share them out.

Competition from shale oil threatens to revive all the old divisions over how to divide output among the organisation's members amid declining market share for OPEC as a whole.

OLD DIVISIONS

The Organization of the Petroleum Exporting Countries has never managed to function as a very effective cartel in the formal sense of a group that sharesout production capacity or production.

Member countries have normally found it easier to agree on a target price than on how to divide production up among themselves. The organisation did not even set production allocations until 1982.

In recent years, OPEC has given up trying to set allocations altogether, instead announcing an overall production target but no distribution among members, and even this has largely been ignored.

OPEC has been rescued from the internal squabbles about quotas and cheating by strong growth in demand for its oil, and a series of wars, sanctions and production problems that have led to output declines from Iraq, Iran, Nigeria, Libya, Algeria and Venezuela at various times over the past decade.

The past 10 years have been a golden age for those OPEC members that could increase output - basically Saudi Arabia and its close allies plus latterly Iraq but not Iran and most of the African and Latin American members.

That golden age is now drawing to an end. OPEC's stronger producers must now confront the reality of sustained declines in demand for their output for the first time in a decade.

PRICE PREDICAMENT

Oil prices are well above the levels Saudi Arabia and its allies need to balance their national budgets, so there is plenty of scope for them to accept some combination of lower prices and/or lower output.

Prices are also well above the marginal cost of developing alternative supplies. Competition for market share can therefore only worsen while benchmark Brent and WTI prices remain above $100 per barrel.

Elevated oil prices are continuing to send a strong signal to consumers about the need to reduce demand, which is worsening the predicament for OPEC.

If Brent remains above $100 per barrel, the market will remain potentially oversupplied. OPEC's secretariat has already warned that its forecasts, based on current supply, demand and prices, "imply a further build in global crude inventories, which currently stand at high levels".

Saudi Arabia and its allies thus face a difficult decision. If they cut production and prices remain high, the market will remain out of balance, and they could be forced to cut again repeatedly, gradually eroding their market share, revenues and political influence.

TURNING UP THE HEAT

Saudi Arabia might try to spread the burden by marshalling support from other OPEC members, notably Iraq, for a policy of restricting production. But OPEC has never found it easy to reach an output agreement until prices start to fall sharply.

If the organisation is like a tea bag because it only works in hot water, the water has to be heated first. Prices are still nowhere near the level that might encourage cooperation among members or shut down surging supplies from shale formations in North America.

It is often said that the only cure for high prices is high prices (meaning that high prices are necessary to stimulate more production). But it is equally true that the only cure for oversupply is a period of lower prices to stimulate demand and switch off the cash flow and incentives for developing alternative supplies.

Whether OPEC decides to cut output this year or Saudi Arabia adjusts its exports unilaterally, the first round of cutbacks is unlikely to be the last. The policy of supporting prices will only get harder.

Story by John Kemp from Reuters. Editing by Jane Baird

reuters.com | July 16 , 2013

Send this story to a friend


Copyright© 1999-2009 Petroleumworld or respective author or news agency. All rights reserved.

We welcome the use of Petroleumworld™ stories by anyone provided it mentions Petroleumworld.com as the source. Other stories you have to get authorization by its authors.

 

Internet web links to http://www.petroleumworld.com are appreciatedPetroleumworld welcomes your feedback and comments,
share your thoughts on this article, your feedback is important to us!
We invite all our readers to share with us
their views and comments about this article.
Write to editor@petroleumworld.comBy using this link, you agree to allow PW
to publish your comments on our letters page.

Any question or suggestions, please write to: editor@petroleumworld.com

Best Viewed with IE 5.01+ Windows NT 4.0, '95,
'98,ME,XP, Vista, Windows 7,8 +/ 800x600 pixels


TOP

Contact: editor@petroleumworld.com/
Phone:office (58 212) 635 7252, cel (58 414) 276 3041, (58 412) 996 3730 , (58  412) 952 5301
Editor & Publisher:Elio C. Ohep A/Producer - Publisher:Elio Ohep /
Contact Email: editor@petroleumworld.com
CopyRight © 1999-2006, Elio Ohep - All Rights Reserved. Legal Information
- CCS office Tele
phone/Teléfonos Oficina: ( 58 212) 635 7252
PW in Top 100 Energy Sites

Technorati Profile

Fair use notice of copyrighted material:
This site is a public free site and it contains copyrighted material the use of which has not always been specifically authorized by the copyright owner.We are making such material available in our efforts to advance understanding of business, environmental, political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have chosen to view the included information for research, information, and educational purposes. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission fromPetroleumworld or the copyright owner of the material.