Lofty oil prices make life easy for OPEC but tough challenges lie ahead

OPEC had a relatively easy 2012 with oil prices holding above the $100/barrel mark despite a still fragile global economy. There were no major public disagreements over output policy between members, unlike in 2011 when the cartel’s June conference ended without an agreement on production levels and with Saudi Arabian oil minister Ali Naimi describing the meeting as the worst ever.

But the next couple of years could present some challenges to OPEC. One particular challenge will be the steep fall in US demand for imported oil, as highlighted on January 8 in the latest Short-Term Energy Outlook from the US Energy Information Administration, which is the statistics arm of the Department of Energy.

US net imports of oil have fallen by 40%, or 5 million b/d, over the past seven years. Having peaked at 12.5 million b/d in 2005, net oil imports averaged just 7.5 million b/d in 2012. By 2014, the EIA expects US net imports to have fallen to 6 million b/d, thanks to the astonishing rise of US shale oil production. Excluding products imports, the agency expects net imports of crude to fall from 8.46 million b/d in 2012 to 7.58 million b/d in 2013 and then to 7.06 million b/d in 2014, a drop of 16% over just a couple of years.

Amid stagnating or waning oil demand in the industrialized countries, the focus of oil-producing countries has already been switching to the growth markets of Asia. And it’s not only OPEC’s Gulf producers that have been feeding Asia’s growing appetite; West African and Latin American producers are also looking to Asia to place their crude.

As it happens, OPEC’s seemingly disastrous June 2011 meeting turned out rather well for the Saudis because when the group met again in December that year, fears of another debacle kept everyone on best behavior and the meeting produced an overall output ceiling of 30 million b/d with no individual country quotas. This has left Saudi Arabia, the only OPEC country with any significant volume of spare capacity, to produce as much as it needs to meet demand from customers.

Of course, this also puts the kingdom firmly in the role of swing producer, the onus being largely on Riyadh to cut output if prices fall sharply over a sustained period. It is Saudi Arabia that the EIA expects to take on the bulk of the output cuts it expects to become necessary this year as non-OPEC production grows further and as some OPEC members–Iraq, Nigeria and Angola — increase output.

Much has been written in recent months about Iraq’s rising production and how this is set to pit Baghdad against Riyadh as rivalry between OPEC’s top two producers intensifies.

Certainly, Saudi Arabia has cause to be more than a little concerned about Iraq’s ambitious plans to boost production and would like to see Baghdad rejoin OPEC’s quota system sooner rather than later. But Iraq is probably still a long way off the kind of production volumes that might pose any real threat to Saudi Arabia’s market management strategy, not least because of continuing tension between Baghdad and the Kurdish Regional Government in Erbil.

One particular bone of contention is the establishment by Baghdad of a new military command to oversee disputed oil-rich territories in northern Iraq. This resulted in deadly clashes between the Iraqi army and Kurdish Peshmerga forces in November.

Another problem that has already emerged as a threat to exports is that of overdue payments to contractors in Iraqi Kurdistan. Iraq’s crude exports in December fell by 272,000 b/d month-on-month and a huge chunk of this drop was due to a a re-escalation of the row between Erbil and Baghdad over the payments issue. Iraqi Kurdistan had supplied as much as 190,000 b/d of crude into the northern export pipeline system earlier in the year. But by last December 26 volumes, were down to a 4,000 b/d trickle.

But, in the meantime, things are rolling along nicely for OPEC. Brent crude prices have started the year at lofty levels of $110-$112/barrel and the oil producer group is still pumping well above its 30 million b/d ceiling, which it extended at December 12 talks in Vienna.


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