OPEC 'maintains' production quota @ 30mbpd

OPEC has maintained its production quota at 30 million barrels per day (bpd) following the conclusion of its 162nd meeting in Vienna, Austria. Member Iraq is yet to be included in the current daily production figure, while Libya would be shortly, it said.

The oil producers group also announced that current Secretary General Abdalla Salem el-Badri's term will be extended for one more year with effect from January 1, 2013 but did not assign any reason for the extension. Under existing norms, an OPEC Secretary General usually steps down after two terms in office.

Sources say, the unexpected move was down to the inability of OPEC members to unite behind a common candidate for the office of Secretary General. The issue has been in the background for some time now.

OPEC said it had reviewed the oil market outlook and the existing supply/demand projections for 2013 in particular. It added that ministers had noted the price volatility witnessed throughout 2012, which in its opinion "remained mostly a reflection of increased levels of speculation in the commodities markets, exacerbated by geopolitical tensions and, latterly, exceptional weather conditions."

It also observed mounting pessimism over the global economic outlook, with downside risks continuing to be presented by the sovereign debt crisis in the Eurozone, high unemployment in the advanced economies and inflation risk in the emerging economies.

Hence, OPEC delegates noted that although world oil demand is forecast to increase marginally during the year 2013, this is likely to be more than "offset by the projected increase in non-OPEC supply" and that projected demand for OPEC crude in 2013 is expected to contract to 29.7 million bpd. This, it said, was "largely behind" its decision to maintain the current production level.

OPEC added that "member countries would, if necessary, take steps to ensure market balance and reasonable price levels for producers and consumers." In taking this decision, member countries confirmed that they will swiftly respond to developments that might have a detrimental impact on an orderly oil market.

Apart from an extension of el-Badri’s tenure, OPEC has appointed Yasser M. Mufti, Saudi Arabian Governor for OPEC, as Chairman of the Board of Governors for 2013, and Ali Obaid Al Yabhouni, UAE Governor for OPEC, as Alternate Chairman for the same period, also with effect from January 1, 2013. OPEC said its next meeting will convene in Vienna, Austria, on May 31, 2013.

Despite persistent questioning by the assembled scribes about details on individual members' quotas, OPEC did not divulge them or how they will be enforced. That's all from the OPEC HQ! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo:  OPEC Secretary General Abdalla Salem el-Badri at the conclusion of162nd OPEC meeting on December 12, 2012, Vienna, Austria © Gaurav Sharma, December 2012.

Initial soundbites before things kick-off at OPEC

The delegates and ministers have walked in, the press scrum (or should you choose the term g*ng b*ng) is over and the closed door meeting has begun – all ahead of a decision on production quotas and the possible appointment of a new secretary general.

Smart money is on OPEC maintaining output at its current level of 30 million barrels per day (bpd), with the Saudis curbing their breaches of set quotas and the cartel reporting a real terms cut in November. No one smart would put money on who the new OPEC Secretary General might be.

But before that, there are as usual some leaks here and some soundbites there to contend with. These generally nudge analysts and journalists alike in the general direction of what the decision might be. Arriving in Vienna ahead of the meeting, Saudi Arabia’s oil minister Ali al-Naimi, the key man at the table, shunned the international media to begin with and chose to issue a statement via his country’s national press agency.

In his statement, Naimi said the main aim of the December 12 meeting is to keep the balance of the global crude markets in order to serve the interests of producers and consumers. He added that balancing the market will help the growth of the global economy. Since then, he has maintained the same line in exchanges with journalists.

As expected, the Iranians feel a cut in production was needed, saying their fellow members are producing 1 million bpd more than they ought to be. Iran said OPEC’s statement last month, that economic weakness in some major consuming countries could shave off 20% from its global demand growth outlook for 2013, lends credence to their claim. However, a delegate admitted there was "little need to change anything" and that the current US$100-plus OPEC basket price was "ok."

Walking in to OPEC HQ, UAE Energy Minister Mohammad bin Dhaen al-Hamli told the Oilholic that he "hopes to solve" the issue of who will be the next Secretary General. Libya's new oil minister Abdelbari al-Arusi, said he was "happy with OPEC production levels.”

Meanwhile, two key men are not in Vienna – namely Kuwait’s oil minister Hani Abdulaziz Hussein and Venezuela’s Rafael Ramirez. According to a Venezuelan scribe, the latter has sent Bernard Mommer, the OPEC representative for Venezuela’s oil ministry, in his place so he could support President Hugo Chavez, who is undergoing cancer surgery in Cuba. Ramirez added that Venezuela did not believe it was necessary for OPEC to increase production quotas and that the market was “sufficiently” supplied.

Finally, in his opening address, Iraqi oil minister and president of the conference Abdul-Kareem Luaibi Bahedh said OPEC faces a period of continuing uncertainty about the oil market outlook. "To a great extent, this reflects the lack of a clear vision on the economic front. The global economy has experienced a persistent deceleration since the beginning of the year...In the light of this, world oil demand growth forecasts for this year have been revised down frequently," he added.

Turning to the oil price, he said it had strengthened in the six months since June. "For its part, OPEC continues to do what it can to achieve and maintain a stable oil market...However, this is not the responsibility of OPEC alone. If we all wish to benefit from a more orderly oil market, then we should all be prepared to contribute to it. This includes consumers, non-OPEC producers, oil companies and investors, in the true spirit of dialogue and cooperation," said the Iraqi oil minister.

Meanwhile, as a footnote, the IEA raised its projections for non-OPEC supply in 2013 in its Monthly Oil Market Report published on December 12. The agency said global oil production increased by 730,000 bpd to 91.6 million bpd in November. With non-OPEC production rebounding "strongly" in November to 54.0 million bpd, the IEA revised up its forecasts for non-OPEC fourth quarter supply by 30,000 bpd to 53.8 million bpd. For next year, IEA expects non-OPEC production to rise to 54.2 million bpd; the fastest pace since 2010.

It also added that OPEC supply rose by "a marginal" 75,000 bpd to "31.22 million bpd". IEA said the OPEC crude supply increases were led by Saudi Arabia, Angola, Algeria and Libya but offset by recent production problems in Nigeria. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo:  OPEC briefing room at 162nd meeting of OPEC, Vienna, Austria © Gaurav Sharma, December 2012.

EIA’s switch to Brent is telling

A decision by the US Energy Information Administration (EIA) this month has sent a lot of analysts and industry observers, including yours truly, crudely quipping “we told you so.” That decision is ditching the WTI and adopting Brent as its benchmark for oil forecasts as the EIA feels its domestic benchmark no longer reflects accurate oil prices.

Ok it didn't say so as such; but here is an in verbatim quote of what it did say: "This change was made to better reflect the price refineries pay for imported light, sweet crude oil and takes into account the divergence of WTI prices from those of globally traded benchmark crudes such as Brent."

Brent has traded at US$20 per barrel premium to WTI futures since October, and the premium has remained in double digits for huge chunks of the last four fiscal quarters while waterborne crudes such as the Louisiana Light Sweet have tracked Brent more closely.

In fact, the EIA clearly noted that WTI futures prices have lagged behind other benchmarks, as rising oil production in North Dakota and Texas pulled it away from benchmark cousins across the pond and north of the US border. The production rise, for lack of a better word, has quite simply 'overwhelmed' the pipelines and ancillary infrastructure needed to move the crude stuff from Cushing (Oklahoma), where the WTI benchmark price is set, to the Gulf of Mexico. This is gradually changing but not fast enough for the EIA.

The Oilholic feels it is prudent to mention that Brent is not trouble free either. Production in the British sector of the North Sea has been declining since the late 1990s to be honest. However the EIA, while acknowledging that Brent has its issues too, clearly feels retail prices for petrol, diesel and other distillates follow Brent more closely than WTI.

The move is a more than tacit acknowledgement that Brent is more reflective of global supply and demand permutations than its Texan cousin. The EIA’s move, telling as it is, should please the ICE the most. Its COO said as early as May 2010 that Brent was winning the battle of the indices. In the year to November, traders have piled on ICE Brent futures volumes which are up 12% in the year to date.

Furthermore, prior to the OPEC output decision in Vienna this week, both anecdotal and empirical evidence suggests hedge funds and 17 London-based money managers have increased their bets on Brent oil prices rising for much of November and early December. Can’t say for last week as yours truly has been away from London, however, as of November 27 the net long positions had risen to 108,112 contracts; a spike of 11k-plus.

You are welcome to draw your own conclusions. No one is suggesting any connection with what may or may not take place in Vienna on December 12 or EIA opting to use Brent for its forecasts. Perhaps such moves by money managers and hedge funds are just part of a switch from WTI to Brent ahead of the January re-balancing act. However, it is worth mentioning in the scheme of things.

In other noteworthy news, Stephen Harper’s government in Canada has finally approved the acquisition of Nexen by China’s CNOOC following a review which began on July 23. Calgary, Alberta-headquartered Nexen had 900 million barrels of oil equivalent net proven reserves (92% of which is oil with nearly 50% of the assets developed) at its last update on December 31, 2011. The company has strategic holdings in the North Sea, so the decision does have implications for the UK as well.

CNOOC’s bid raised pretty fierce emotions in Canada; a country which by and large welcomes foreign direct investment. It has also been largely welcoming of Asian national oil companies from India to South Korea. The Oilholic feels the Harper administration’s decision is a win for the pragmatists in Ottawa. In light of the announcement, ratings agency Moody's has said it will review Nexen's Baa3 senior unsecured rating and Ba1 subordinated rating for a possible upgrade.

Meanwhile, minor pandemonium has broken out in Brazil’s legislative circles as president Dilma Rousseff vetoed part of a domestic law that was aimed at sharing oil royalties across the country's 26 states. Brazil’s education ministry felt 100% of the profits from new ultradeepwater oil concessions should be used to improve education throughout the country.

But Rio de Janeiro governor Sergio Cabral, who gets a windfall from offshore prospection, warned the measure to spread oil wealth across the country could bankrupt his state ahead of the 2014 soccer world cup and the 2016 summer Olympic games. So Rousseff favoured the latter and vetoed a part of the legislation which would have affected existing oil concessions. To please those advocating a more even spread of oil wealth in Brazil, she retained a clause spreading wealth from the “yet-to-be-explored oilfields” which are still to be auctioned.

Brazil's main oil-producing states have threatened legal action. It is a very complex situation and a new structure for distributing royalties has to be in place by January 2013 in order for auctions of fresh explorations blocks to go ahead. This story has some way to go before it ends and the end won’t be pretty for some. Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo: Pipeline, Brooks Range, Alaska, USA © Michael S. Quinton/National Geographic.

A meeting, an appointment & Vienna’s icy chill!

The Oilholic finds himself back in Vienna for the 162nd meeting of OPEC ministers and his first snowfall of the festive season; the latter has eluded him back home in London. Here is a view of Vienna's snow-laced Auer Welsbach Park and it’s not the only place where things are a bit chilly. The OPEC HQ here could be one place for instance!

For this time around, accompanying the usual tussles between the Saudis and Iranians, the doves and the hawks, is the additional stress of appointing a successor to OPEC Secretary General Abdalla Salem el-Badri, a genial Libyan, who is nearing the end of his second term.

Finding a compromise candidate is usually the order of the day but not if 'compromise' is not a by-word for many of its members. Trouble has been brewing since OPEC members last met in June. As a long term observer of the goings-on at OPEC, the Oilholic can say for certain that all the anecdotal evidence he has gathered seems to suggest a clash is imminent. That’s hardly a surprise and it could not have come at a worse time.

OPEC has forecast a 5% drop in demand for its crude oil in wake of shale supply and other unconventional oil from non-OPEC jurisdictions hitting the market in a troubling global macroeconomic climate. It also acknowledged for the first time that shale oil was of concern and then got into a debate with the IEA whether (or not) US production could overtake Saudi Arabia’s by 2020. In light of all this, OPEC could seriously do with some strong leadership at this juncture.

Sources suggest three 'potential' candidates are in the running to succeed el-Badri. Two of these are Thamir Ghadhban of Iraq and Gholam-Hossein Nozari of Iran. Both have served as their country’s respective oil ministers. The third man is Majid Munif; an industry veteran and a former Saudi OPEC adviser. Now, the Oilholic uses the world ‘potential’ above for the three men only guardedly.

Historical and recent acrimony between the Iranians and Saudis needs no documentation. It has only been a year and half since an OPEC meeting broke-up in acrimony and er...highly colourful language! This puts the chances of either one of them settling for the other’s candidate as highly unlikely. Iran is also miffed about the lack of support it has received in wake of international sanctions on its oil industry by several importing jurisdictions.

Some here suggest that Ghadhban of Iraq would be the compromise candidate for the post. However, sources within four MENA OPEC member delegations have told the Oilholic that they are backing the Saudi candidate Munif. Yours truly cannot predict whether they’ll have a change of heart but as things stand, a compromise banking on the appointment of an Iraqi is just not working out.

Never say ‘never’ but the possibility of el-Badri continuing is remote as well. He is not allowed more than two terms under OPEC rules. In order to assuage both the Iranian and the Saudis, perhaps an Ecuadorian or an Angolan candidate might come forward. While such a candidate may well calm tempers in the room, he (or she, there is after all one lady at the table) is highly unlikely to wield the leverage, clout or respect that el-Badri has commanded over his tenure.

As Kuwait prepares to hold the rotating presidency of the cartel, a stalemate over the Secretary General’s appointment, according to most here, is detrimental to “market stability”. How about it being detrimental to OPEC itself at a time when a medium term, possibly long term, rewriting of the global oil trade is perhaps underway?

That's all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo:  Snowfall at Auer-Welsbach Park, Vienna, Austria © Gaurav Sharma, December 2012.