x Abu Dhabi, UAEFriday 21 July 2017

OPEC primed for a Viennese waltz

OPEC ministers are widely expected to rubber-stamp an extension of the group's current production ceiling when they meet tomorrow in Vienna.

The new OPEC building in Vienna, host of the 156th meeting of the oil exporters group.
The new OPEC building in Vienna, host of the 156th meeting of the oil exporters group.

VIENNA // Still smelling of fresh paint in shades of ash and charcoal, OPEC's airy new headquarters exudes an unaccustomed sense of calm. It may be the calm before the storm. OPEC ministers are widely expected to rubber-stamp an extension of the group's current production ceiling when they meet tomorrow in the Austrian capital Vienna, while proclaiming unity of purpose in balancing the global oil market.

Any such announcement, however, would gloss over new stresses which, as early as next year, could create rifts within the organisation controlling 40 per cent of the world's crude supply. The issue boils down to whether Gulf Arab oil producers such as Saudi Arabia, Kuwait and the UAE will continue to bear the brunt of production cuts, or whether they will move to protect their market share by ramping up crude output.

Notwithstanding what the group may publicly announce tomorrow, there is abundant evidence that any OPEC members capable of doing so are laying the groundwork for higher production. More than a handful are already pumping more crude than a year ago, including Saudi Arabia, the most influential member of the group. The kingdom already has a large spare capacity cushion and, along with the UAE, is stepping up drilling activity this year.

Meanwhile Iraq, with the world's highest potential to raise output, has signed contracts for major drilling programmes in its biggest oilfield. Major questions loom over how and when Iraq's production aspirations could be accommodated within the OPEC framework. Currently, Iraq is the only OPEC member without a quota. Outside the Gulf, Angola, Nigeria and Venezuela have all indicated they will push for higher OPEC quotas sooner rather than later, as the global economy recovers. Overall, OPEC-member compliance with the existing quotas, which have remained unchanged since December 2008, has slipped below 60 per cent from more than 80 per cent a year ago, as the price of a barrel has rebounded to about US$80 from less than $35.

"Compliance in general is low," said Catherine Hunter, an energy analyst with IHS Global Insight, "which puts the onus on a few actors, including Saudi Arabia, to bear the pain, and risks eroding group credibility if prices start to go into reverse." Maintaining stable quotas and consistent policy has served the group well over the past 15 months, she added. There is little doubt that most members are happy with relatively stable crude prices in the range of $70 to $80 per barrel, which is high enough to assure strong export revenues for most OPEC producers while still too low to stimulate competition from resources such as oil sands and biofuels.

Now, however, other parameters are in flux. For OPEC, much will depend on the strength of the economic recovery that is expected to drive a rebound in global oil demand. One big unknown is how the end of fiscal stimulus packages will play out. Some see a new oil price bubble taking shape, less than two years after the last one burst, while others see crude falling. Will OPEC be able to maintain stable policies and a unified public front in the face of such uncertainty? That is a question that may not be fully answered tomorrow.

@Email:tcarlisle@thenational.ae