Pop quiz: When is the next OPEC meeting?
You may be excused for drawing a blank.
If you care to put it in your holiday season calendar, the next meeting of the Organization of Petroleum Exporting Countries is Dec. 12. Yet the gathering is eliciting the attention of few. The institution that could once instill fear in oil markets with mere whispers is now lucky to elicit a polite yawn when delegates from its 12 member states assemble in the festive city of Vienna.
Not long ago, OPEC meetings were highly anticipated events. Closed-door meetings were a forum for calculated market collusion. The price of a barrel of oil often nudged higher a few days in advance, as traders anticipated production cuts or sensed members’ intransigence toward increasing output to meet growing demand.
After a meeting was adjourned, the rumor mill shifted to whether or not the cartel could maintain its discipline. An individual member’s temptation to cheat for extra market share, by shipping clandestine oil above quota, was great (and it still is). Under-the-tanker deals could easily put a few more million dollars into the state coffers of regimes like Venezuela.
OPEC meetings don’t hold much attention these days in part because the international price of oil (Brent) has been fairly steady for the past couple of years, trading above $90 a barrel. The price has been generally agreeable to OPEC producers and has grudgingly become acceptable to global consumers. This implies some sense of supply-demand balance, with some of the supply still held back by the members, notably Saudi Arabia – but it’s a tenuous balance.
Right now, OPEC is notionally committed to a supply ceiling of 30 million barrels a day. But it’s actually pumping 31.2 million right now. Keeping a discipline of supply restraint will become increasingly difficult in 2013, because Iraq – which overtook Iran in August as the cartel’s number two producer after Saudi Arabia – is ratcheting up its production at an impressive pace (see related chart). Until recently, Iraq’s resurgence was counterbalanced by production losses between two OPEC brethren: Libya and Iran. Civil war in the former and sanctions against the latter helped hide Iraq’s not-so-subtle, postwar return to the market. But Libya is back on line and Iran appears to have stopped its decline.
Surely Iraq’s 700,000 B/d day surge in output over the past 12 months will be at the top of the secretary general Abdullah Al-Badri’s discussion agenda next week. A back-of-the-napkin calculation at a Vienna café would tell him that North Dakota’s current run-rate production growth, while worrisome, pales by comparison at only 200,000 B/d per year.
Stagnant global oil demand will also be on the agenda. Lingering euro zone woes, decelerating GDP in emerging countries and the potential for an already weak U.S. economy to jump off the “fiscal cliff” are all factors contributing to total oil consumption flat-lining around 90 million B/d over the past two years. Substitution from biofuels and natural gas are also competitive threats that are hurting oil demand. Growth will eventually resume, but it’s not likely to happen with any vigor next year, which is an ominous backdrop to an industry that’s been accustomed to seeing consumption routinely expand by more than 1 million B/d every year.
Agenda item number three, if there is any time left at the meeting, will surely be the supply growth in North America. Swelling light tight oil (LTO) and oil sands production have pushed out roughly 2 million B/d of foreign imports into the U.S. since 2007. So far, this hasn’t been a problem because high-growth markets like China have picked up the displaced surplus. Yet, this can’t continue. Mopping up an increasing amount of excess oil will not be sustainable if global demand doesn’t pick up (back to discussing Agenda Item 2).
We may see some headlines come out of OPEC’s Dec. 12 meeting; notably the appointment of a new secretary general. Some pundits are suggesting that the cartel may agree to lop another 500,000 B/d off of its 30 million B/d target quota. Historically, a cut in production had a tendency to drive up price but, this time, such a move would likely be negative to price. For one thing, a cut would be an admission that global demand is weakening. Also, 500,000 B/d is mere top-line chatter in a new oil era when innovation is driving accelerating supply increases from multiple regions. Finally, few would believe that the cartel could muster the self-discipline to abide by further cuts.
Bearish overtones for oil heading into 2013 must certainly be troubling for OPEC ministers. If demand doesn’t start picking up soon the cartel’s supply-side anxiety will be multiplying at next year’s meetings. On top of that, few are likely to put their meeting dates in their calendars.
Peter Tertzakian is chief energy economist and managing director with Arc Financial Corp. in Calgary and provides analysis on technology and energy-related businesses to fund managers and portfolio companies.Report Typo/Error