Opec faces tough call over oil output

In the opaque world of Opec, a big headline boost to the cartel’s output quotas could translate into a tiny rise, or no change at all, in actual oil production.

oilWhen Opec’s oil ministers meet in Vienna on Wednesday, they are expected to consider their first increase in output quotas for almost four years, a sign of concern about the impact on the global economy of oil prices above $100 a barrel.

But when the cartel ministers speak about crude oil production, they might be referring to quotas, meaning the official – and routinely flouted – output levels. Or they could be talking about the real supply of crude oil, an entirely separate concept with a different impact on global oil markets.

As such, the actual wording of Opec’s communiqué will be as important as the headline production increase.

The market could experience a volatile reaction as traders struggle to assess the scale of any production increase.

The present quotas, agreed in December 2008, bind Opec members, apart from Iraq, to produce 24.85m barrels per day. In practice, the 11 countries subject to constraints produced 26.15m b/d in April, or 1.3m b/d above the agreed total, according to the International Energy Agency, the western countries’ oil watchdog.

If Opec decides on Wednesday to raise quotas by anything up to 1.3m b/d, this will only formalise existing overproduction, rather than increase the availability of oil to the market.

For actual output to climb, Opec would have to raise its official limits by more than 1.3m b/d.

However, even an increase of 1.3m b/d in the quotas could boost actual production if countries flout the limit and produce more.

There is another problem: nobody knows exactly how much Opec is pumping out.

The most reliable data come not from the energy ministries of member states but from secondary sources – a network of individual spotters watching, binoculars in hand, the movement of tankers in and out of the world’s biggest export terminals.

The IEA and Opec members themselves rely on data from these spotters.

The lack of reliable official numbers complicates policymaking. Take Saudi Arabia, the world’s largest oil exporter and Opec’s de facto leader.

The country told the Joint Oil Data Initiative (Jodi), a semi-official database, that it had produced 8.65m b/d in March, the most recent month covered by Jodi figures. But Opec itself estimated Saudi production at 8.75m b/d, while the IEA put the figure at 8.9m b/d.

Meanwhile, Ali Naimi, the kingdom’s oil minister, told journalists last month that his country produced 8.3m b/d in March.

The margin of error of 600,000 b/d between the lowest and highest estimate for Saudi Arabia is greater than the entire output of Ecuador, Opec’s smallest member.

All this can make the business of changing the cartel’s production policy tricky. Moreover, any change in quotas or actual output would not address another thorny issue: the balance of production between the 11 Opec members in the system. If ministers tried to change the relative size of the slices of the quota cake, as opposed to merely giving everyone the same proportions, this would lead to political tension.

Some Opec members are under-producing, such as Venezuela and Nigeria, and others producing well above their quota, Saudi Arabia and Algeria for instance.

“If they get bogged down in an argument about shares of the total, it’ll be very difficult,” says Leo Drollas, chief economist at the Centre for Global Energy Studies, a think-tank in London. To avoid this, he says, ministers are likely to keep the proportions unchanged.

However, avoiding the issue of quota redistribution does not guarantee an easy outcome. Far from it.

Some analysts believe any revision in oil production policy may well prove elusive.

The rivalry between Saudi Arabia and Iran, Opec’s two biggest producers, could render it impossible to reach agreement, meaning that the present quotas will live on, leading to further flouting of the production limit.

Mr Naimi has repeatedly said that he favours oil prices of $70-$80 per barrel; meanwhile Brent crude, the most important benchmark, sold for $115.84 last Friday.

For oil traders, Wednesday’s decision matters whichever way Opec jumps.

The cartel remains a powerful force in the market and, amid fears over the strength of global economic growth, a big headline move could still have the capacity to surprise.

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