Oil prices on the up as OPEC rolls into 2011

By Margaret McQuaile

January 13, 2011 - OPEC started 2011 with two clear warnings, one from the International Energy Agency and one from the US Energy Information Administration, as oil prices continued to climb, repeatedly breaking upward through fresh two-year highs.

IEA chief economist Fatih Birol said last week that prices, with North Sea Brent already in the mid-$90s/barrel, had entered a "dangerous zone" and threatened to derail the global economic recovery.

"The oil import bills are becoming a threat to the economic recovery. This is a wake-up call to the oil consuming countries and to the oil producers," Birol said.

The IEA said new analysis showed that oil import costs for OECD countries had shot up by $200 billion to $790 billion at the end of 2010. "...this increase, triggered by high oil prices, is equal to a loss of income of 0.5% of the OECD countries' combined gross domestic product," it said.

The agency also said the European Union’s oil import bill had grown by $70 billion in 2010, noting that this figure was equal to the combined budget deficits of Greece and Portugal.

"It may not be a bad idea that the producers are ready to increase production and show their understanding that these high prices are not good for the global economy," Birol said.

The warning from the EIA, the US Department of Energy's statistics arm, was fired directly across OPEC's bows.

On January 11, it projected that the price of West Texas Intermediate crude would average $93.42/b -- $7.34/b higher than its previous forecast a month ago -- in 2011 and $97.50/b in 2012.

The EIA said it expected OPEC crude production to continue to rise over the next two years to accommodate increasing world oil consumption, especially in view of expectations of limited production growth from independent producers.

But, it added, "should OPEC not increase production as global consumption recovers, oil prices could be significantly higher than the central forecasts."

So far, OPEC does not appear to have been fazed by the price climb. Even as ministers gathered in Quito last month, OPEC secretary general Abdalla el-Badri said OPEC was comfortable with the higher prices, which had already climbed above $90/b.

Indeed, he said, if crude prices did climb to $100/b it would be because of speculation as there was no shortage of oil, and that prices would therefore fall back again.

OPEC's current agreement, reaffirmed as expected in Quito, has been in place for two years. It sets target production for the 11 members bound by quotas -- Iraq remains outside the group's quota system -- at 24.845 million b/d.

Actual production from the OPEC-11, however, is some some 2 million b/d higher, boosted by the stronger prices, with the Platts survey showing that these members pumped an average 26.84 million b/d in December, 140,000 b/d more than in November.

As the higher December volumes show, OPEC doesn't need to meet to pump more oil. Some analysts have expressed concern that the group fixed its next meeting for June. Top OPEC officials have said that the group can call a meeting at any time if it feels one is necessary.

But earlier this week OPEC's new president, Iranian oil minister Masoud Mirkazemi, said there would be no need for a meeting if prices did climb to $100/b, saying prices were lower in real terms. Venezuela's Rafael Ramirez and Libya's Shokri Ghanem have also talked of $100/b as a fair price for crude.

Arguably, Saudi Arabia's opinion is the one that counts most. Oil minister Ali Naimi has declined to comment on the likelihood or implications of crude prices reaching $100/b, but Platts estimates show that the kingdom accounted for the bulk of OPEC's December output increase.

North Sea Brent crude was trading within a dollar and a half of $100/b on January 13.

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