September 11, 2007
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OPEC sprang a surprise at its September 11 talks in
Vienna with an unexpectedly large increase in official crude
production levels. From November 1, the group's official
target will rise to 27.25 million b/d, 1.45 million b/d more
than the previous 25.8 million b/d target set in February.
The increase is designed to legitimize close to 1 million
b/d of current overproduction and add an additional 500,000
b/d of physical supply.
OPEC's official communique announced an increase of
500,000 b/d "in the volume of crude supplied to the market"
but did not say what the new production target would be.
However, OPEC Secretary General Abdalla el-Badri said the
new target was 27.25 million b/d.
Although talk of a 500,000 b/d increase seemed to be in
the cards as the formal meeting started, ministers had been
giving little away in public and the size of the increase in
the formal target had not been expected.
The mechanics of the deal will see the group establish a
new baseline of 26.75 million b/d for the increase, based on
estimates by secondary sources of the group's actual output
of August, OPEC's research chief Hasan Qabazard said. From
this base, the additional 500,000 b/d has been shared on a
pro rata basis among the 10 countries.
Speaking in Washington ahead of the OPEC decision, US
Energy Secretary Samuel Bodman urged OPEC to increase
production, saying failure to do so could stifle US and
world economic growth.
Lower economic growth is "not in the interest of
suppliers," Bodman told reporters. He added that an increase
in supply "would help" curb crude prices, which have been
inching up toward $80/barrel in recent weeks.
The price increases seemed to stem from a combination of
supply not meeting demand and "fear in the market," Bodman
said. "Suppliers have had great difficulty keeping up with
demand," he said, adding that OPEC had been "trying to
strike a reasonable balance in a complicated world."
Lawrence Eagles, head of the International Energy
Agency's Oil Markets Division, welcomed the increase. "It's
an indication that OPEC is sensitive to the recent
tightening of the market, and we hope they're going to
continue responding to market signals," he said. "It's
probably a smaller increase than we would have liked but
probably more than the market was expecting a few days ago,"
he added.
The specific baselines and new production targets for the
individual countries were not disclosed.
The agreement to raise production came despite public
statements by most OPEC ministers in the days prior to the
meeting that they saw no shortage of oil on world markets.
Tellingly, Saudi Arabia did not declare its hand
publicly. Nor did Saudi officials comment on a September 7
report from US-based analysts PFC Energy saying Saudi
sources had been signaling that OPEC might need to consider
raising production by between 500,000 b/d and 1 million b/d.
In the event, with oil prices riding close to record
highs, OPEC's formal communique said the group had moved to
boost supplies to the market to counter tightness in US
product markets and in light of the shift of the futures
market into backwardation, which encourages consumers to
draw on oil stocks.
"The conference reviewed the current oil market
conditions and prospects and, once again, observed that
action taken by OPEC member countries to increase production
over the preceding several years has led to a comfortable
build-up in inventory levels, especially of crude," it said.
"It was, on the other hand, noted that ongoing tightness
in the US products market continues to affect the level of
product stocks and prices. The conference further observed
the recent shift of the forward market into backwardation
and its implications on stocks. It also noted that the
high-demand winter season necessitates keeping the market
adequately supplied."
OPEC's newest member Angola, which joined the group from
the start of this year, remains outside the quota system for
the time being, but not for much longer.
Badri said Angola, Africa's second-biggest and
fastest-growing producer, would be included in the quota
system from the beginning of 2008. Badri said he did not
know what level of production Angola might be asked to
adhere to. "For now we don't have a target," Badri, who
visited Angola last month, said.
Earlier September 11, Manuel Vicente, head of Angolan
state oil company Sonangol, said the country's current
production was 1.6 million b/d and would rise to 2 million
b/d by the end of the year.