Mirror, mirror on the wall…will OPEC increase (officially) output?
By all accounts — OPEC’s Monthly Report being one of them — the cartel (or as they like to think of themselves, the “Producer Group”) called OPEC is producing around 29 MMbbl/d. OPEC calculates 2011 demand for its oil to average 29.9 MMbbl/d. Thus, in the simplest of terms, the Group needs to raise production by upwards of 1.0 MMbbl/d to balance demand.
However, and when we are discussing OPEC, there is always a however …OPEC’s official (wink, wink… nudge, nudge) target is 24.9 MMbbl/d. Iraqi production is presently not beholden to quotas, thus if you subtract out that production, estimated at 2.7 MMbbl/d, then OPEC is already cheating on its target by the tune of 1.4 MMbbl/d.
The price of OPEC’s basket of oil averaged $118.09 in April, while a year ago the basket averaged $82.33. More importantly, a year ago one barrel of OPEC’s oil could buy 61.3 euros, today, one barrel fetches 81.59 euros. Thus, despite the depreciation of the U.S. currency, OPEC still enjoyed a U.S.$/€-cross adjusted return of 33%.
As illustrated in today’s issue of The Schork Report, the market’s concern of the future imbalance between supply and demand has done a complete 180° turn from a year ago. The current term structure is a mirror of a year ago, i.e., the market for Brent crude oil on the ICE has morphed from a well-defined contango to backwardation. In other words, the market today is concerned regarding the ability to supply future demand; hence the bid to secure spot barrels.
Bottom line, OPEC has to increase output, especially given the precarious state of the U.S. economic recovery.
We appreciate that the situation in Libya creates the template for a contentious meeting tomorrow in Vienna, but OPEC has weathered worse. After all, this is a group that was able to hammer out deals while two of its key members, Iran and Iraq, were slaughtering each other on the killing-fields of the 1980s.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.