Oil and Gas

OPEC Likely to Keep Oil Quota Unchanged

Lisa Auret

The Organization of Petroleum Exporting Countries (OPEC) will likely keep its official flow of oil steady when its meets Sept. 11 in Vienna, despite concerns that already high prices will spike when winter demand increases.

"Currently enough oil is in the market," Acting Iranian Oil Minister Gholamhossein Nozari said, according to the official IRNA news agency. "Our efforts are for OPEC to keep its current (production) ceiling."

OPEC sets supply limits for 10 of its 12 member oil producing countries, and market watchers widely expect it to maintain the supply output, decided at the group’s previous meeting in March, of 25.8 million barrels a day.

The oil cartel has come under increasing pressure recently by the International Energy Agency (IEA), an advisor to 26 industrialized nations of the Organization for Economic Cooperation and Development (OECD) region, to provide relief to what it sees as a rapidly tightening oil market this winter.

Near record crude oil prices are sending a message to OPEC that the world is very tight, Nobuo Tanaka, the new head of the IEA, told Reuters on Sep. 5. And the IEA said in its last oil market report that world oil demand is likely to outpace supply this winter as heating oil demand in North America ramps up.

But OPEC officials have rebuffed the IEA's calls for more supply, saying crude supply is ample and they are not to blame for shortages of refined fuel and political tension.

"There will be no increase in productions as supply and demand are in balance and the market is not suffering from any shortages," Qatar's energy minister Abdullah bin Hamad al-Attiyah said at the sidelines of a conference on gas in Doha on Sep. 4, AFP reported.

Only Indonesia, OPEC's second-smallest producer has voiced a proposal for an increase

Closing in on the August Record

Oil prices neared the Aug. 1 record high of $78.77 a barrel last week, as investors weighed OPEC’s reluctance to boost supplies. Recent U.S. fuel inventory data has shown a decrease in both crude and gasoline production.

Oil Pump
Natacha Pisarenko

OPEC President Mohammed bin Dhaen al-Hamli, who is also oil minister of the United Arab Emirates, emphasized in an interview with Reuters that a shortage of skilled labor and bottlenecks in the refinery sector were key factors in high oil prices, and were beyond the producer nations' control.

A string of unplanned outages in the U.S. refining system has created tightness in the gasoline market this summer. Reports of problems at Port Arthur, Texas refineries operated by Motiva Enterprises and Valero Energy have supported prices.

Prices climbed 3% as Hurricane Felix threatened the Gulf of Mexico, home to many U.S. refineries. So far this year, the U.S. and Mexican oil sectors have escaped major storm damage, but the Colorado State University recently forecast the rest of the 2007 Atlantic hurricane season to be busy, with a total of 15 named storms, according to Reuters.

Geopolitical tensions between Iran and the West and refinery outages due to rebel activity in Nigeria also continue to provide support.

But an OPEC delegate suggested to Reuters that although it's likely that the cartel will leave supply output at its previous level, it could increase the oil production quota at their next meeting on Dec. 5, should demand prove robust and inventories fall.

Credit Crunch Impact on Energy Demand

OPEC will also be taking the recent volatility in the financial markets into account, as a slowdown in the U.S. economy could cut oil consumption for the remainder of the year.

The possibility of the subprime crisis hitting energy demand will stop OPEC ministers from increasing production quotas next week, according to a Thomson Financial survey of analysts

If OPEC were to raise crude production -- at a time when prices are susceptible to weakness because of increasing risk aversion -- oil futures could fall sharply, making a production boost a less attractive option for ministers whose income relies on the commodity, the analysts said.

A couple of weeks ago oil prices fell below $70 for the first time since late July, when tightening credit markets concerns led traders to sell in order to raise cash to cover losses in stocks.

The IEA's Tanaka told Reuters that it was too early to judge the impact of a global credit squeeze on economic growth and oil demand.

"We will have some kind of assessment by the end of the year," he said. "We are more cautious than before as the current subprime financial market turmoil is creating uncertainty in the future."

OPEC is also less willing to raise output as the group's members see their spending power eroded by the weak dollar.

"U.S. demand for oil has slowed to a halt, that’s according to the weekly numbers published by the Department of Energy. So, in a slowing demand environment, I think OPEC is quite cautious to expand supply rapidly," Francisco Blanch, head of commodities research at Merrill Lynch, told CNBC.

OPEC President on Capacity

OPEC has spare capacity ready to meet extra demand if necessary, but any additional crude it produced now would go into already high stockpiles, OPEC President Mohammed bin Dhaen al-Hamli told Reuters.

"Unfortunately, I don’t think we are going to get much change from OPEC, but regardless of what they cite officially, I think unofficially we might see a little increase in supply from Saudi Arabia and maybe from some of the other OPEC members," Blanch said.

Some OPEC members have been pumping extra barrels in recent weeks as customers have asked for more crude -- although the larger producers are still keeping a cap on supply.

A current survey made by Dow Jones Newswires for OPEC production in August showed that the OPEC-10 produced 1.1 million barrels a day above what is officially its daily output.