OPEC: As Irrelevant As Ever

March 16, 2009

All eyes were on OPEC this weekend. Yawn.
  • OPEC thinks it has cut enough
  • Compliance level for previously agreed upon cuts are high
  • Russian support?

 

Oil markets on Friday had something to look forward to this weekend – the Organization of the Petroleum Exporting Countries met at the modest Hofburg Palace in Vienna to discuss quotas, prices and the general meaning of life. In the end, even though countries such as Algeria and Libya had signaled the need for further production cuts in the days leading up to the meeting, OPEC balked, and left production levels alone.

With the decision made Sunday, OPEC is counting on the previously planned cuts to make a difference in oil prices as the effects slowly travel through the system. Back in December, the members of OPEC agreed to the second of two production cuts, totaling 4.2 million barrels per day based on September 2008's output. At Sunday's meeting, OPEC was much more concerned with compliance with those cuts than with cutting production any further.

At this point, OPEC estimates that they have roughly an 80% compliance rate to the production quotas that were set back at the end of 2008. That means approximately 80% of that 4.2 million barrels per day (or 3.36 mb/d) are not being produced, out of a peak 32 mb/d at OPEC's peak production:

 

OPEC and World Oil Supply

 

(From the OPEC monthly report, which is always must-reading.)

It's worth noting that these cuts put it back around 2002 production levels (29 mb/d), an anomalous year. More realistically, production in the 27 mb/d range sends us back to the mid-90s. Kind of like the stock market.

It is thought that some countries, such as Saudi Arabia, have cut more than required, and others still have cuts to make. But of course, a lot of these numbers are estimates, and all analysts have their own estimates on how good compliance really is. From an article by Rachel Ziemba, an analyst with RGE monitor:

 

"Compliance has been good among the other Gulf Arab countries, the UAE, Kuwait, and Qatar, all of whom are estimated to have implemented around 85% of their agreed output cuts. After that, the Nigeria and Libya have implemented 60-70% of the cuts, while compliance by Algeria and Angola (the newest OPEC member) is estimated to be between 50-60%. And bringing up the rear – Iran, Venezuela and Ecuador are expected to have implemented only 40% of the cuts."

 

(For a full accounting of what Reuters believes compliance to be, see here.) Most analysts agree that an 80% compliance rate is considered quite good compared with compliance to earlier cuts.

So here we are, OPEC producing about 3.36 million barrels per day less currently than it was in September – and oil prices have settled into a somewhat steady level of $35 to $45 per barrel.

 

The World According to Crude

 

OPEC members can't be happy about that – but they are in some ways stuck between a rock and a hard place. Yes, oil prices are low, but they could be worse. Compared to December 22's closing price of $30.81, Friday's close at $46.25 is manna from heaven. And yes, the countries would love to see higher oil prices – in fact, many of their budget projections call for oil above the $50 mark. But demand is surprisingly low ...

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