OPEC compliance not burning issue just yet

VIENNA// OPEC's decision yesterday to leave production targets unchanged was widely expected after it was tipped by the group's ministers well ahead of the meeting. As such, it will have little market impact. In coming weeks, however, crude could come under pressure from a growing realisation that the past year's upwards creep in actual OPEC output is destined to continue, regardless of whether the market is ready to absorb the extra barrels.

Some analysts suggest that by failing to raise its production ceiling, OPEC has wasted an opportunity to signal confidence in the outlook for economic recovery, the only force likely to restore global oil demand to its pre-recession level and long-term upwards trend. Normally, a rise in OPEC quotas would be bearish for crude as it would signal increased supply, while a decision to stay flat would be neutral or bullish.

But after two back-to-back years of shrinking global oil demand, these are far from normal times. Recent oil market stability is "very fragile", while the state of the global economic recovery remains "unstable and uneven", Germanico Pinto, the president of OPEC, said yesterday. The key to whether OPEC's rollover on quotas will be positive or negative for crude lies in how seriously the group's influential Arab members are perceived to be tightening up on the group's overall compliance, which has recently slipped to about 50 per cent.

"Compliance has been a little disappointing," Mohammed al Hamli, the UAE Minister of Energy, said yesterday before the meeting. Other Arab ministers, however, have refrained from even such mild criticism. Saudi Arabia's oil minister, the most influential within OPEC, said this week he was pleased with compliance. Algeria's veteran oil minister, Chakib Khelil, indicated that member discipline was not a burning issue for OPEC.

The market was worried "about the recovery, about the geopolitical situation, about the weakening US dollar", he said. "So why should we be worried about compliance?" The ministers may not be bothered, but oil bulls should be. @Email:tcarlisle@thenational.ae