OPEC keeps oil output limits unchanged, mindful of global economy

September 11, 2009 - OPEC agreed, as expected, at late night talks in Vienna September 9 to leave its current crude production limits unchanged for the time being, after ministers expressed their satisfaction with current price levels despite high stock levels in consumer countries.

The outcome of the meeting had been widely expected, with almost all of the group's ministers saying in the run-up to the talks that they saw no need to change production for the time being.

OPEC's official communique issued after the meeting noted the fragility of the nascent recovery in the global economy, adding that it did not want to rock the boat by cutting output, despite weak oil market fundamentals.

"Whilst there are signs that economic recovery is underway, there remains great concern about the magnitude and pace of this recovery, especially in the major industrialized nations of the OECD," it said.

"There has been some easing of the overhang in crude oil stocks but market fundamentals remain weak, refinery utilization rates are low and product inventories have risen considerably."

"Accordingly, since the market remains over-supplied and given the downside risks associated with the extremely fragile recovery, the conference once again agreed to leave current production levels unchanged for the time being. In doing so, the conference reiterated its determination to ensure sound supply fundamentals and an adequate level of spare capacity for the benefit of the world at large," OPEC said.

Ceiling unchanged at 24.845 million b/d

The agreement means the combined ceiling for the 11 OPEC members bound by quotas remains at 24.845 million b/d, the level agreed after a series of output cuts totaling 4.2 million b/d in late 2008.

Production levels will next be reviewed at a December 22 meeting in the Angolan capital Luanda.

As oil prices have risen in recent months, OPEC's compliance with its agreed output cuts has slipped, falling to 66.8% in August from nearly 82% in March, according to surveys of OPEC and industry officials by Platts.

But with oil currently trading at around $70/barrel, Saudi Arabian oil minister Ali Naimi said ahead of the meeting that this leakage above official supply limits was not a problem

"We don't have to [enforce stricter compliance]. People are complying anyway. 70% is great," Naimi said. "The price is perfect."

Algeria's Chakib Khelil said the group was relatively unconcerned by high stock levels, which the International Energy Agency estimates stood at close to 62 days of forward cover in the OECD at the end of July. OPEC has tended to prefer the number of days of forward cover to be closer to 52 days.

"We are less worried because of the correlation between stocks and prices is not the same as in the past. Now we see stocks increase and prices increase," Khelil said.

"At the same time, stocks are not increasing as much and will probably stabilize with continued discipline from OPEC and probably more so if the economy improves," he said.

Sanguine about bumper stock levels

Saudi Arabia's Naimi agreed, saying stock levels were having no impact on prices.

"Stocks have no bearing on price. You must realize there is a fundamental change in the market."

Asked what that fundamental change was, Naimi explained that economic growth was key. "That is what will drive the price. Oil today is a commodity like equities, stocks and so forth."

Naimi also said that a sharp drawdown in stock levels to 52-54 days of cover--a range OPEC has previously said it would favor--would not be desirable.

"That would be too tight...that would tighten the market too much," the Saudi minister said.

OPEC's secretary-general Abdalla el-Badri saw things differently when he talked to reporters after the meeting, saying that stricter compliance by OPEC would eliminate a worrying inventory "overhang" early next year.

"The stock overhang has moved from crude to products ... when we look at fundamentals, we see this overhang and it is a big concern for us," said Badri.

"More compliance will eliminate this overhang, maybe not the end of the year but the first quarter of next year," he said, adding that OPEC hoped to reduce the number of days of forward stock cover in OECD countries to 52 days.

Briefing reporters a day later, Badri said the world economy would also be a key factor in OPEC decision making when it meets in Luanda, Angola, on December 22.

"I think OPEC will not look at the fundamentals alone...they will look at the fundamentals and the economic situation in the world. They cannot take an action that will affect any recovery," he said.