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Will OPEC Pump More Oil Starting Thursday?

As the countdown draws to a close for the start of OPEC’s deliberations in Vienna on Thursday, two of its heavyweight members could once again clash over critical policies at a time when the cartel is struggling to maintain its influence.

OPEC Headquarters
Photo by: Justin Solomon
OPEC Headquarters

Against a weaker global economic backdrop and a sharp fall in oil prices as of late, several talking points will be on the table. Two that are likely to be at the top of the agenda are production quotas and the selection of a new Secretary General.

The Saudi Oil Minister, Ali Al-Naimi, kicked off a vociferous debate among observers and participants when telling the Gulf Oil Review that analysis suggested there was a “need for a higher ceiling than currently exists.”

OPEC's overall output target was last adjusted upwards in December to 30 million barrels per day (bpd).

When no consensus was reached on an increase last summer, Saudi Arabia acted unilaterally under pressure from the United States and jitters about demand destruction from Arab Spring-driven oil prices.

Al-Naimi is a man who well understands the weight his words carry, and therefore the call for a higher output ceiling cannot be taken in stride.

The move could be interpreted in several ways, but likely it is an effort to formalize the already higher outputs.

“Saudi Arabia would like an official increase in quota as having actual production massively over the official quota is not good for the credibility of the organization,” Olivier Jakob, Managing Director at Petromatrix, told CNBC.

Adherence to existing quotas among OPEC’s 12 members is already low for the organization by historical standards and an increase in official quotas would lend some breathing space in cutting real output, if need be, later this year.

Fair Price

The Kingdom is still pumping at the highest levels in three decades, while OPEC produced 31.58 million bpd in May, according to secondary sources in OPEC's latest oil market report released on Tuesday.

Saudi officials have said time and time again that $100 a barrel was a “fair” price for producers and consumers. Its allies on the Gulf peninsula have similar views, as growing fiscal expenditures need to be offset by stronger oil revenues to safeguard annual budget surpluses.

“Although it would be unusual for OPEC to raise production with prices falling rapidly, a 500,000 bpd increase would still put production around 1 million bpd below the current level,” Paul Gamble, Chief Economist and Head of Research at Riyadh-based Jadwa Investment, told CNBC.

The world’s top oil exporter has been under pressure to further tap its power to provide. On Monday, the Turkish Energy Minister said talks had begun on long-term crude purchases. The move partially stems from growing international sanctions on Iran, which has forced many countries to at least rethink their exposure to Iranian crude imports in a bid to avert financial sanctions from the United States.

But changing the output quota will not be a walk in the park. Iran, which experts believe is gradually feeling the squeeze from falling oil revenues, was quick to respond to suggestions of quota changes, pointing out that existing quotas had to be respected.

More tensions loom in the selection process for a new Secretary General, as both Saudi Arabia and Iran have fielded a candidate of their own. Neither country has held the position in over three decades, possibly opening the door for a compromise candidate from either Ecuador or Iraq.

The deep-rooted suspicion between Riyadh and Tehran, which extend to accusations of regional political interference, may ultimately prevent any tangible progress at this summer’s meet.

Jakob believes “there is currently a too significant geopolitical dispute between Saudi Arabia and Iran for OPEC to function as it is expected to and Saudi Arabia is likely to continue doing whatever it was, irrespective of formal OPEC announcements”.

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Yousef Gamal El-Din is CNBC's Middle East Correspondent and contributes to the channel’s flagship shows, as well as analysis for CNBC.com.

Stay in touch with him on Twitter at http://www.twitter.com/youseftv @youseftv

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