OPEC Relaxed in Face of Threat from Non-OPEC Sources!

The background to today’s meeting was like many others – would there be a surprise although this time certainly on the outside there was a feeling of absolute calm. At the opening ceremony, everyone seemed relaxed and some ministers were either putting on a brave face when asked about the threat from shale or they genuinely did not recognise it as a problem for today. The Saudi minister certainly did not!

During the open forum just before the opening speech, the area was not as crowded or busy as usual and I asked the Angolan Minister how he felt about the threat from shale particularly as his country’s market is one that is at risk. He just shrugged it off with the view that the global market is big enough for all OPEC supplies. I then moved on to the Venezuelan Minister whose administration has always been critical of the US its largest customer and got a similar reaction from him. However, the advent of shale and the view that the US could become self sufficient in time is something new and OPEC doesn’t yet know what it impact it will have.

The other topic dominating OPEC being the appointment of a new Secretary General, something OPEC has been unable to do. Market followers gather at these OPEC Meetings looking for some kind of confrontation with or within OPEC but today there was little to be found except perhaps frustration over their inability to agree on the new appointment and the unknown impact of shale primarily on Algeria, Angola, Nigeria and Venezuela.

The opening speech is usually delivered by the President of OPEC and the position is currently held by Kuwait. However, Kuwait has been changing ministers with such alacrity in recent months the new incumbent wasn’t available and the role was taken on by the Alternate President, Dr Abdel Bari Ali Al-Arousi, from Libya, another newcomer. He talked about fluctuations in the oil price since the last meeting in December which has ranged broadly from $100 to 110 and went on to say that the downward trend in recent months was due to financial difficulties in advanced economies but naturally would not accept that these were partially affected by higher oil prices. He said that demand would rise by 800,000 bpd in 2013 and that non-OPEC supply would rise by 1mbpd while their economic growth forecast for the year was 3.2% which is closely aligned to the OECD forecast.

What he also didn’t say was that for OPEC it has been an easy run in recent months. Geo-political tension in the Middle East and Africa has kept the oil price at the $100 level and without it if the price had been driven by fundamentals it would probably be closer to $75. So for OPEC overall the market is good and this was strongly reiterated by the Saudi Minister. Furthermore, higher oil prices curtail progress and restrict growth while encouraging development in alternative energy sources particularly from non-OPEC regions. The doors closed and OPEC moved in to its Closed Session although most ministers had disclosed their expectations beforehand!

Surprisingly the president did not attend the Press Conference which was handled by the Secretary General Abdalla El Badri. Ironically OPEC has recognised ,that downsized risks in the OECD region remain unchecked and so I asked him if with Europe and the rest of the OECD countries struggling to get out of recession they had been in for four or five years now, did OPEC feel that $100 per barrel was reasonable for consumers.

He naturally replied that if such countries were unhappy with the prices paid their respective Governments should reduce taxation levels on oil products because they make more money out of OPEC oil than OPEC does. This was a predictable answer to a question that I needed to ask and a point that I wanted to make.

The Conference had noted that most of the increase in demand of 800,000 bpd during the current year would come from the non-OECD regions, that non-OPEC supply projected to grow by 1.0 mbpd, and that OECD stock levels remain comfortable. Taking these facts in to account with the view that fundamentals would probably ease during the remainder of the year against seasonally higher demand, OPEC would stick to the existing production ceiling of 30.0 mbpd confirming that another meeting would end without action. OPEC has given itself six months now in which to consider who to appoint as the next Secretary General and whether or not to acknowledge the impact of oil and gas from shale. My guess is they will have problems on both counts.

With the Meeting over I should like to discuss the salient points that concern me and I’m sure other market followers. Three years ago, $75 seemed to be the acceptable benchmark for OPEC crude but having seen the price at $100+ for too long they have convinced themselves that $100 is the right figure. How can a consuming world accept and increase of 33% at a time when much of the world is facing financial crisis and notably across the EU and within the US? They can’t and it was naïve of OPEC to believe they could get away with it. Not only has perception reversed from Peak Oil on reserves to Peak Oil on demand! While at the same time, higher oil prices have stimulated the search for alternative energy sources and with vast quantities of Oil & Gas from Shale having been discovered in the US together with the Canadian Tar Sands while the shale epidemic, it seems that OPEC has misread the market. Thanks to its high price policy not only has demand been hit but non-OPEC supply sources have abounded.

OPEC still seems confident about the future but it was interesting to look behind the scenes. Traditionally the monitoring committee, MMC, has met for a couple of days before each OPEC Meeting to analyse the figures and the facts and the gossip and then supposedly advise Ministers accordingly. For many of the key ministers issues are more domestic than global coupled with relationship from one to another. The MMC has now been disbanded and one assumes that members will look at the market for themselves and then decide on what action needs to be taken. Similarly the individual quotas seem to have been dropped although there was talk of Libya wanting an increase from 1.5mbpd to 1.7mbpd. Collectively, OPEC has a production ceiling level of 30mbpd but consistently manages to exceed this level. If members were asked to cut back, as individuals they probably wouldn’t but would carry on producing whatever they could sell. The only producer who can readily balance the market is Saudi Arabia and that is where any strength in OPEC is left. Collectively it remains a force but a weak one and members must recognise that the greater the internal strife the more fragmented it becomes and the weaker it gets.

The position of Secretary General is regarded as ceremonial only. However, I disagree with this and believe that it is the true face of OPEC. The OPEC President holds office for one year only and with the number of ministerial changes that we have seen in recent years amongst members to hold out for a year is something of a challenge. I feel that Mr. E-Badri who has been Secretary General for six years now has consistently put across OPEC views clearly and more moderately than some of the current contenders. The position needs to display some impartiality although in oil consuming countries OPEC has few supporters.

The two main contenders now are Saudi and Iran. Saudi is the actual controller of OPEC simply because it accounts for around one third of total output capacity and classified as a “dove”. Furthermore, supported by the Gulf States – Kuwait, Qatar, UAE – it will take a moderate and pro-West stance. On the other hand Iran is not only the leading “hawk” but also one that is feared by the Saudi and the Gulf States and when backed by countries like Venezuela and Algeria who are supposedly anti-West the internal strife escalates. With sanctions imposed against Iran over its nuclear ambitions and with forthcoming elections leading towards a more hard line administration Iran would not be the chosen Secretary General of OPEC for the OECD region.

This is the issue for OPEC and one that could see the relationship of OPEC with its customers in the developed world adversely affected. Therefore, depending on who wins the contest, the so called “ceremonial” role will became something that could readily affect geo-political tension either way and that is why the outcome is so important.

Non-OPEC energy sources are developing rapidly but how sustainable are they? A few years ago the US was running out of natural gas and then, suddenly, shale came in to the market and the US then had enough natural gas to last 100 years! How sustainable are supplies from shale? Is the process a simple one or do producers have to keep sinking new wells each time one pocket runs dry and what are the environmental aspects. The UK is concerned about environmental damage but with the recent report that the UK was recently set to run out of gas within a few hours will environmental concerns be out weighed by lack of supply? These are issues that will impact on development.

Meanwhile with the coming of oil and gas from shale the US has pulled out of the global LNG market as a major customer and alleviated pressure within that market and assuming supplies from shale are as forthcoming as predicted will soon become and exported of gas. For those countries, Algeria, Angola, Nigeria and Venezuela that are expected to lose much of their business with the US they will have to seek markets elsewhere and with demand set to rise from non-OECD sources my guess is that they will have no shortage of customers in the East for their products.

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