Bloomberg News

OPEC’s ‘Worst Meeting’ Ends Without Agreement, Boosting Prices

June 09, 2011

June 9 (Bloomberg) -- OPEC failed to agree on crude production for the first time in at least 20 years, with six members opposing a Saudi Arabian push to increase output, sending oil prices above $101 a barrel.

“It was one of the worst meetings we’ve ever had,” Saudi Oil Minister Ali al-Naimi said as representatives of the 12- member Organization of Petroleum Exporting Countries left the meeting in Vienna yesterday after five hours of talks. “We were unable to reach an agreement.”

Crude in New York jumped 2.7 percent in the 20 minutes after the meeting ended. The split underscores growing divisions within the group that accounts for about 40 percent of the world’s crude. Saudi Arabia, OPEC’s largest producer, Kuwait, Qatar and the United Arab Emirates proposed increasing group output by 1.5 million barrels a day to 30.3 million barrels. They were blocked by members including Iran and Venezuela, which warned of a “collapse” in prices.

“We expect OPEC’s credibility to be damaged by the meeting’s outcome,” said Serene Lim, a commodity strategist at Australia & New Zealand Banking Group Ltd. in Singapore who forecast oil will average $105 a barrel in New York this year, said. “The divide among the Arab states as well as the inability of Saudi Arabia to control the group may be a supporting factor to prices.”

Crude Gains

Crude for July delivery rose as much as 73 cents to $101.47 a barrel in electronic trading on the New York Mercantile Exchange today and was at $101.31 at 11:31 a.m. Singapore time. The contract climbed $1.65 yesterday to $100.74, the highest settlement since May 31. Prices are up 36 percent the past year.

“It’s a bit surprising because the Saudis usually get their way,” said Mike Wittner, the New York-based head of oil- market research at Societe Generale SA. “There were very diverse opinions going into the meeting and even looking at the fundamentals, there were different signals,” he said in an interview yesterday. Wittner said before the meeting there was a 65 percent chance OPEC would decide to raise production.

A Bloomberg survey of 30 analysts conducted from May 24 to May 31 showed that 27 believed the group would probably leave its output quotas unchanged.

“This is crude bullish as there is certainly no consensus within the group and OPEC is not ready to act united,” said Andrey Kryuchenkov, an analyst at VTB Capital in London who correctly forecast the group wouldn’t change its target. “The market remains undersupplied.”

‘Disconcerting’ Outcome

OPEC’s spare production capacity is poised to dwindle, David Greely, a New York-based analyst at Goldman Sachs Group Inc., said yesterday in an interview. Rising global demand for oil will exhaust the group’s surplus capacity next year, said Goldman, which forecast on May 24 that Brent crude will rise to $120 within six months and $130 within a year. Brent climbed as much as 0.3 percent to $118.23 in London today after settling 0.9 percent higher at $117.85 yesterday.

While the lack of coordination appears “disconcerting, the fact remains that the vast majority of OPEC spare capacity remains in Saudi Arabia,” Greely said. “Consequently, it still remains a question of Saudi’s willingness and ability to raise production to keep pace with world oil demand growth.”

Saudi Arabia Stretched

It will be a “stretch” for Saudi Arabia on its own to add the 1.9 million barrels of daily oil out needed to meet the 30.87 million barrels of daily demand OPEC forecasts in the third quarter, JPMorgan Chase & Co. analysts including New York- based Lawrence Eagles wrote yesterday. The bank reiterated its forecast that oil will reach $130 a barrel in 2011.

Crude has gained 11 percent this year, boosting revenue for producers while raising concern that price gains will stunt economic growth and stoke inflation.

The U.S. Labor Department said on June 3 that employers added 54,000 workers to payrolls in May, the fewest in eight months. The International Energy Agency trimmed its 2011 forecast for oil demand last month for the first time, after saying on April 12 that prices above $100 a barrel are starting to hurt the global economy.

Iran, the group’s second-biggest producer, has historically taken a harder line on prices than its regional rival Saudi Arabia. Constrained by economic sanctions over its nuclear program, it’s pumping at close to full capacity.

New Powerhouse

“Iran has replaced Saudi Arabia as the powerhouse in OPEC,” said Olivier Jakob, Managing Director of Geneva-based Consultancy Petromatrix.

Besides Iran and Venezuela, OPEC members opposing a higher production ceiling were Libya, Angola, Ecuador and Algeria. Venezuela was concerned crude prices would tumble if OPEC increased quotas, the country’s oil minister said in an interview with state television.

“There was a proposal to raise output by between 1.5 million barrels a day and 2 million,” Rafael Ramirez said. “We, given the uncertainty in the market, thought that could cause the price of oil to collapse.”

They were “vehemently against increasing production,” Saudi Arabia’s Naimi said, adding that he and his group tried for several hours to persuade the six of the need for more oil. “In 16 years, I’ve never seen an obstinate position,” he said.

Mohammad Aliabadi, the acting Iranian oil minister and current OPEC president, speaking through a translator, described the meeting as “polite and cordial.”

“I don’t know why he called it the worst meeting,” Aliabadi said.

IEA Disappointment

Iran refused to sign on to the agreement that OPEC reached at a 1999 meeting, said Leo Drollas, chief economist at the Centre for Global Energy Studies in London. The last time OPEC adjourned a meeting with no agreement was in the early 1980s, when Iraq and Iran were at war.

The IEA expressed “disappointment” over OPEC’s failure to reach an agreement. “Of course what really matters is actual supply, which should move in line with seasonally rising demand, and we urge key producers to respond accordingly,” the Paris- based agency said in a statement.

Demand for OPEC crude will rise by 2.1 million barrels a day in the third quarter from the group’s total output in April of 28.8 million barrels a day, Naimi said.

“Saudi Arabia is committed to supplying the needs of the market regardless of the disagreement,” he said.

Emergency Capacity

OPEC announced its biggest-ever output cuts in December 2008 amid a collapse in global demand, capping production at 24.845 million barrels a day for all members except Iraq, which is exempt from the quota system. The limit has remained unchanged since then.

The 11 nations with production quotas pumped 26.15 million barrels a day in April, according to the IEA. That leaves the group with about 4.5 million barrels a day of spare capacity, most of it in Saudi Arabia, to be tapped in an emergency.

The 50-year-old organization met as fighting in Libya shut off most of the output from Africa’s third-largest producer. A rebellion against Libyan leader Muammar Qaddafi has cut shipments from the North African country by almost 90 percent, according to Bloomberg estimates.

Qaddafi’s OPEC representative, who arrived late to the meeting in Vienna, said Libya will fulfill existing agreements with oil companies within the country.

OPEC delegates weren’t able to resolve how to deal with the Libyan outage, according to Barclays Plc analysts led by Paul Horsnell in London.

“While OPEC remains a force for the protection of any potential price downside, it now appears to be out play for the rest of the year as a constraint on the upside to prices,” Barclays said. “We continue to see price risks being skewed heavily to the upside.”

--With assistance from Ayesha Daya and Anthony DiPaola in Dubai, Rachel Graham, Sherry Su and Lananh Nguyen in London, Mark Shenk in New York, Paul Gordon in Hong Kong and Chua Baizhen in Beijing. Editors: Paul Gordon, Justin Carrigan

To contact the reporters on this story: Fred Pals in Amsterdam at fpals@bloomberg.net; Grant Smith in London at gsmith52@bloomberg.net; Ola Galal in Cairo at ogalal@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net


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