ANALYSIS: OIL OUTPUT LIKELY TO RISE, SMALL PRICE FALL IS AIM
By Keith Hammond
BRUSSELS (MktNews) - When ministers from the Organisation of Petroleum Exporting Countries meet later this month they will likely agree a small production increase, aimed at generating an oil price slightly below current levels but avoiding a price collapse.
With surging oil prices threatening to push up inflation rates throughout the industrialised world, all eyes will be on the meeting of OPEC ministers in Vienna on March 23rd.
When ministers meet it seems unlikely that they will be discussing the merits or otherwise of allowing prices to rise yet further. What they will be discussing is the best strategy to hold prices at a stable level, probably even a litle lower than the current one.
Allowing a further price rise would not only seriously annoy the US in an election year, which some at least of the key OPEC members would prefer to avoid, it would also encourage a substantial increase in exploration and development expenditure in the industry. This would not suit key OPEC members such as Saudi Arabia, which already has capacity to produce more than it can sell without undermining prices.
How great the risk is of a price collapse, and how to avoid this risk without the price going up in the short term, is what ministers probably will be discussing. Most industry players, from producers through to end-users, have been watching the oil price this year waiting for it to crack.
The belief that prices were bound to fall led many to position themselves short, which meant they had to cover their positions when the expected correction failed to materialise. This contributed greatly to the most recent upward price move, with US hedge funds reportedly a factor in the market.
The debate in Vienna will not be between countries wanting higher and lower prices, but between countries with similar price objectives but different assessments of the state of the market and the level of production consistent with their target price.
On the one hand there are those such as Saudi Arabia, who think the demand situation is strong enough to absorb more supply and fear an unwelcome further price rise in the absence of action.
On the other hand are those such as Iran, who feel the price has anyway been artificially boosted by a short-term squeeze. They fear that boosting output just as this effect unwinds, and at a time of year when demand is anyway weak, risks a collapse in prices.
Those in the first camp will argue that Western stocks are so low that any excess supply will go into rebuilding them -- and how far they can convince others of this will be key to the outcome. Iran has in recent days both expressed doubt about the need for higher production and supported the goal of price stability.
The objective of most OPEC members is probably a similar one. Most would be happy with an oil price stable around $25, some a bit higher, some a bit lower.
None of the big producers want to see a price as low as $15 or as high as $35. Given this measure of agreement on objectives, a compromise deal increasing output, but by a limited amount, seems the most likely outcome.
The head of one trading operation spoken to by Market News reckoned a production rise of about 2 million barrels a day was likely in Vienna, and that might not be a bad guess. On Friday, the International Energy Agency estimated in its March report that crude output would have to rise around 2.3 million barrels per day in order to return to average levels in the period 1990-1996, "even assuming that non-OECD stocks are unchanged." |
