OPEC WRAP: Support builds around 500,000 b/d ceiling hike

OPEC WRAP: Support builds around 500,000 b/d ceiling hike

Vienna (Platts)--13Jun2005


Support was building Monday around a proposal to increase OPEC's 27.5-mil b/d
crude production ceiling by 500,000 b/d at Wednesday's meeting of the cartel
to bring official limits more closely in line with actual production. Ali
Naimi, oil minister of the group's most powerful producer, Saudi Arabia, had
already said during a weekend visit to Norway that he favored an increase and
he reiterated that support as he arrived in Vienna Monday. Algeria's Chakib
Khelil and Nigeria's Edmund Daukoru also said they would support the proposal,
made early last week by OPEC president Sheikh Ahmed Fahed al-Sabah, to
increase the ceiling. Libya's Fathi ben Shatwan appeared equivocal. Iran's
Bijan Zanganeh and the UAE's Mohammed Dhaen al-Hamli, both of whom have still
to arrive in the Austrian capital, were less than enthusiastic about the move,
but neither came out against it. The one dissenting voice appeared to be that
of Venezuela's Rafael Ramirez, who was quoted by state news agency ABN as
saying Caracas would call for a rollover of the current ceiling.

Oil prices were not impressed by the prospect of a ceiling hike, US light
crude settling $2.08 higher at $55.62/bbl in New York, within three dollars of
the $58.28/bbl record traded April 4. Saudi Arabia's Naimi made the point that
current high oil prices were not caused by a lack of supply. "What is driving
the price is not supply. What is driving the price is the lack of refining
capacity worldwide," he said. "And everybody is concerned about middle
distillates," he said. Naimi has repeatedly said in recent months that Saudi
Arabia is ready to pump its full 11-mil b/d capacity if there is a need for
the additional 1.5-mil b/d. But he has also said that there is little demand
for the extra barrels of lower-quality heavy crude because of the inability of
the global refining system to process it. "Saudi Arabia has 1.5-mil b/d spare
capacity--if the demand is there we will produce it," he said in Norway. "If
people want that medium and heavy crude, they are welcome to it. The refining
system has a limit, and that's what the problem is."

Naimi was asked on arrival in Vienna whether Riyadh was prepared to increase
production to 10-mil b/d. "We can, but 'will' depends on demand," Naimi said.
"Where are the customers?" he asked. Two days earlier, in Norway, he said:
"The reason we are producing 9.5-mil b/d is that is what is needed by our
customers. They are not asking for 10-mil b/d." On the issue of raising the
ceiling, however, Naimi said: "I support the process by which the ceiling will
be lifted up 500,000 b/d." Algeria's Khelil echoed Naimi's remarks on the
ceiling. "Yes, I support it, I think everyone is going to support it," he
said. But Khelil also said he thought there was currently no shortage of crude
and that increasing output would not have much impact on the market. "I think
there is plenty of oil on the market. We could put a little bit more if that
is what it takes to calm the market, but I don't think it is going to affect
the market," he said.

Libya's Shatwan said a ceiling hike would not result in an immediate drop in
physical oil prices but could have enough of a psychological" impact that it
could eventually lead to lower prices. "I think it will have no physical
impact on prices, but it may have a psychological impact on the price," he
said. But Shatwan did not come out strongly in favor of an increase. "I think
they either increase the current ceiling up to current production...increase
500,000 b/d as they stated before, or they should wait (until the next
meeting)," he said. Nigeria's Daukoru said he would not have "any problem"
with the proposed ceiling hike. But Iran's Zanganeh said a ceiling increase
would have no impact on either prices or on the physical market although it
would "probably serve to widen the differential between sour and heavy crude
and light."

A senior non-Gulf delegate said raising the ceiling by 500,000 b/d would be "a
purely symbolic gesture." "It will not have any impact on the market because
the market knows that we are already pumping flat out. We know that stocks are
sufficient, the demand is very strong, but the problem is the refining
bottlenecks and that is what is behind these high prices," he said. A Platts
survey estimated output by the 10 members with quotas at 28.2-mil b/d in May
and total output, including that of Iraq which does not participate in the
quota system, at 30.03-mil b/d. Current OPEC policy, led by Saudi Arabia, is
to allow consumer stocks to build ahead of expected higher demand later this
year. Until March this year, preventing inventories from rising had been a key
component in the cartel's market management strategy. But with OPEC
increasingly pushing against the limits of its production capacity, Riyadh led
the policy shift to allow inventories to build and thus help to prevent prices
from spiking to unacceptably high levels.

Naimi was asked in Vienna whether he was concerned that inventories might now
be building too fast. "No, no, no, we have no concerns," he said. But the
UAE's Hamli, still in Abu Dhabi, said maintaining OPEC output [including
volumes from Iraq, which is not part of the quota system] at the current level
of close to 30-mil b/d into the second half of the year could lead to a
stockbuild of 800,000 b/d by year-end. Quoted by official UAE news agency WAM,
Hamli said this proved that supply was higher than market needs. OPEC
ministers had two choices, he said, either to raise the 27.5-mil b/d ceiling
or keep quotas unchanged. His remarks appeared to suggest that the UAE would
not back an increase in actual output. The proposal to raise the ceiling came
early last week from OPEC president Sheikh Ahmed Fahed al-Sabah a few days
ahead of a June 9 meeting with top EU officials in Brussels. The proposed
500,000 b/d hike had already been authorized in principle when OPEC met in
Iran in March, Sheikh Ahmed said last week.

This story was originally published in Platts Global Alert
http://www.globalalert.platts.com

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