Is OPEC right to ignore the oil price pessimists?

OPEC has often been criticized in the past for failing to cut crude output until the tide of oversupply is washing up at its shores. On Wednesday, the cartel ignored all the latest tidings of doom and gloom and rolled over for at least another six months the 30 million b/d output ceiling that has been in place since January last year. What else could it have done?

Undoubtedly, there is a long list of possible developments that could put heavy downward pressure on oil prices.

Firstly, non-OPEC production is expected to continue climbing as the shale boom in the US continues to bear fruit – the International Energy Agency last month forecast a 1.8 million b/d year-on-year increment in 2014, on the heels of an already notable 1.3 million b/d increase in 2013.

And OPEC member Libya is pumping just 250,000 b/d at the moment but the authorities keep saying they will be able to push output up to 1.5 million b/d once they sort out the various local difficulties that have closed ports and shut down crude production. Iraq expects to add about 500,000 b/d of production next year. And Iran says it will push production and exports back to pre-sanctions levels.

That could add up to a lot of oil next year…if it all comes about. Because as we all know, expectations don’t always turn into reality.

Take Libya. The interim authorities clearly do not control the country, which has descended further into lawlessness and anarchy in recent months as rival militias vie for position. Just think back to October, when the prime minister was briefly abducted, allegedly by a militant group close to a faction within the government. Bookmakers’ odds on the likelihood of Libya restoring output to the targeted 1.5 million b/d in the short term would probably be very long indeed.

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An increment of half a million barrels per day from Iraq doesn’t sound like a huge volume. Except when you remember that this was meant to have happened this year. The IEA in May said Iraq would continue to account for most of OPEC’s incremental capacity over the next five years, increasing its own production by nearly 1.6 million b/d over the period to 2018. But the IEA also said that “continued above-ground challenges” such as the ongoing dispute between Baghdad and the Kurdistan Regional Government were slowing down development.

Iraqi oil minister Abdul Karim Luaibi said this week in Vienna that he expected Iraq’s oil output to average 3.4 million b/d in 2014, including 400,000 b/d from the semi-autonomous Kurdistan region in the north of the country – a relatively modest prediction compared with the ambition of previous Iraqi targets.

Iranian oil minister Bijan Zanganeh, returning to OPEC for the first time since 2005, has made clear that once sanctions are lifted Iran will push its production back quickly to 4 million b/d. But sanctions have to be lifted first and that will not happen until the middle of next year at the earliest. The clock has yet to start ticking officially on the interim six-month deal reached in Geneva on November 24 and which gives Iran some sanctions relief in return for some concessions on its nuclear program.

As analyst Neil Atkinson says, “in practice it is unlikely that a perfect storm of much higher production from OPEC and non-OPEC countries will actually happen.”

Atkinson says there will indeed be higher production from somewhere but that it is unlikely to be so high that Saudi Arabia and its Gulf allies Kuwait and the UAE will be unable to cope with it by trimming their own production, though he does add a note of caution: “Whether or not we can say the same thing when OPEC meets again in June is the big question facing oil markets in 2014.”

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