OPEC agrees to renew oil cap for six months: Delegates

Reuters With CNBC
The logo of the Organization of the Petroleum Exporting Countries (OPEC) is seen at the headquarters building in Vienna.
Alexander Klein | AFP | Getty Images

The Organization of the Petroleum Exporting Countries agreed on Wednesday to renew for the first half of 2014 a collective oil production cap of 30 million barrels a day, two OPEC delegates said. Separately, the Saudi oil minister confirmed OPEC will keep its production ceiling unchanged

The 12-member OPEC is enjoying oil prices at $112 a barrel for Brent crude, comfortably above its preferred price of $100 a barrel.

Two member countries, Libya and Iran, are producing well below capacity because of civil strife and sanctions respectively, helping support prices.

What is Saudi Arabia's bottom line for propping up oil prices unilaterally before it leans on the rest of OPEC to help share the burden?

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At $112 a barrel for Brent crude, well above OPEC's preferred $100, it may not look like a hot issue just yet. As Ali al-Naimi, oil minister for Saudi Arabia, OPEC's biggest producer said this week, the oil market is in "the best situation it can be'' and at "the right price.''

That was reflected in Wednesday's straightforward decision by the Organization of the Petroleum Exporting Countries to renew for six months its 30 million barrel-a-day output cap for the first half of 2014.

But Iraq and Iran, second and third in the OPEC league table, made clear they have no interest in taking part in a collective cut should one be required next year.

With oil production from the United States rising fast and a number of OPEC members aiming to restore full output after sanctions and civil strife, a new OPEC deal may be required as early as it's next meeting in June.

"It's not a question of if but when,'' said one OPEC delegate. "Maybe we'll talk about cuts in six months time,'' conceded a delegate from one of OPEC's Gulf Arab producers.

Iran and Iraq both feel they are special cases because of production lost to sanctions, Iraq over decades under Saddam Hussein up to 2003 and Iran over the past two years for its nuclear program.

Iranian Oil Minister Bijan Zanganeh said Iran will take oil production back to 4 million barrels a day once sanctions are lifted even if oil prices drop to $20 a barrel.

"Under any circumstances we will reach 4 million bpd even if the price falls to $20 a barrel,'' said Zanganeh. ``We will not give up on our rights on this issue.''

Zanganeh said OPEC previously "has shown it's smarter than that'' and normally made way for countries that had suffered setbacks to production.

His Iraqi counterpart said Baghdad would not contemplate being roped into an OPEC allocation that limits its production next year and wouldn't cut output.

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"Why should we cut? There is no reason,'' said Iraqi Oil Minister Abdul Kareem Luaibi.

Add Libya, hoping to convince armed separatist protesters to stop blocking production, and a significant slice of OPEC will plead special status should OPEC need a new deal.

Will Saudi go below 8 mbpd

That would leave its most reliable producers, the core Gulf Arab countries—led by Saudi Arabia with Kuwait and the United Arab Emirates—to turn down the taps.

Saudi's Naimi shrugged off the prospect of a flood of additional supply next year.

"One source comes and another source disappears,'' he said.

Reporters, he added, were "preoccupied with Iran.''

"They are welcome, everyone is welcome to put in the market what they can, the market is big and has many variables—when one comes in another comes out.''

Iran will need a year to start exporting oil: Pro

The Gulf producers clearly don't share Iran and Iraq's optimism about how fast they can lift output, privately forecasting growth next year from the two countries combined of about 500,000 barrels a day.

But if Libya restores full production that would add a million barrels daily.

And many are now forecasting that the U.S. energy renaissance, buoyed by shale, will add a million barrels a day for an astonishing third year in a row to reach 12 million bpd.

That would more than meet global demand growth next year of the 90 million bpd world market, requiring Saudi Arabia to drop towards 9 million by the middle of next year, already having dropped half a million bpd to abou 9.7 million from record highs earlier this year.

(Read more: Saudi Arabia: Markets will handle Iran oil boost)

"The Saudis would be prepared to cut back towards 9 million,'' said an OPEC delegate. "But they would be reluctant to give up further market share without an all-inclusive OPEC agreement.''

"The Saudis will be prepared to trim production to make room for Libya and a bit of Iraq, but I think 9 million barrels a day is their line in the sand,'' agreed Yasser Elguindi of Medley Global Advisors.

Oil markets may marvel at OPEC's ability to squabble about the next meeting or the one after, when there is nothing to argue about at the current one.

"This is shadow boxing. Iran has no way of bringing output back to 4 million immediately. As for Iraq, recent history indicates their targets are unlikely to be met,'' said Bill Farren-Price of Petroleum Policy Intelligence.

"If the oil price really looks like over-shooting on the downside, it will be in everybody's interest—including Iran and Iraq—to find ways to stabilize the price. At that point, pragmatic decision-making will replace cheap rhetoric."

By Reuters. CNBC contributed to this report.