OPEC set to keep output unchanged despite apparent oversupply

OPEC set to keep output unchanged despite apparent oversupply

Caracas (Platts)--1Jun2006

OPEC ministers meeting in Caracas later Thursday are expected to leave
current crude production levels unchanged as continuing high oil prices of
more than $70/barrel override increasing concerns about the potential impact
of seemingly abundant supply.
The cartel is convinced that there is too much oil on the market, some
ministers and delegates expressing the view that if the group were looking
only at fundamentals of supply and demand, it would in fact have to consider
cutting production. But, as several ministers have made clear, cutting
production is not an option when oil prices are riding high at $70/barrel.
With various output capacity expansion projects underway, consumer oil
inventories brimming, and the high prices apparently beginning to have an
impact on oil demand growth, the view among some ministers and senior
delegates is that the question is not whether oil prices are set to fall but
when and by how much.
At the same time, however, the memory of last year's devastating
hurricanes--which have left more than 300,000 b/d of oil production shut in in
the Gulf of Mexico--remains strong. Thursday marks the official start of the
2006 hurricane season, which is expected to be "active."
Earlier this week, a US federal official said that despite nearly nine
months of efforts to improve offshore standards and lines of communication in
preparation for the 2006 season, a big storm similar in strength to last
year's hurricanes Katrina or Rita would cause "substantial" shut-ins.
For OPEC, raising official production levels does not seem to be an
option either, with most member countries pumping at the limits of their
capacity. Only OPEC kingpin Saudi Arabia--producing around 9.5 million b/d of
its 11.3 million b/d capability--has any significant volume of surplus
capacity, but oil minister Ali Naimi has said repeatedly that there is little
interest from refiners in taking the extra oil because it is mostly too heavy
for their tastes.
OPEC's current 28 million b/d production ceiling, which covers ten
members but not Iraq, has been in place since July 2005, and independent
estimates suggest that OPEC-10 output is hovering around that level.
Lawrence Eagles, head of the Paris-based International Energy Agency's
oil markets division, said he saw little scope for anything other than a
rollover of OPEC's current ceiling. "I don't see the difference from any other
meeting. There have been concerns since 2003 that prices will fall and they
haven't," he said. "It is very clear that there is no need to cut at this
point in time," he said, although he added: "We are seeing signs that high
prices are affecting demand."
OPEC's meeting in the Venezuelan capital coincides with crucial talks on
member country Iran set to take place in Vienna later Thursday between the US,
Europe, China and Russia.
A day earlier, US Secretary of State Condoleezza Rice said the US was
ready to join direct talks with Iran if Tehran suspended uranium enrichment.
The Iranian nuclear issue has been a key factor pushing prices--which climbed
above $75/barrel in late April--higher in recent months. Although Iran has
insisted it does not intend to use oil as a weapon in its dispute with the
international community, there has been market concern that an escalation of
the dispute could lead to Iranian crude exports being disrupted.

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