OPEC Split Unlikely to Have Major Impact on Oil Prices

OPEC's unusually high-profile public rift over whether to add oil to the world market should not drive oil prices higher or affect global crude supplies, energy experts say.

It also does not necessarily spell the end of the organization of oil producers.


OPEC ended its meeting in Vienna Wednesday, failing to reach agreement on an anticipated production increase and sparking fears of oil supply shortages that could damage the global economic recovery.

Oil prices jumped on the news, with NYMEX WTI crude crossing $100 and London Brent rising more than 1 percent. But some analysts and traders see the move as just a knee jerk reaction. NYMEX crude also reacted to an unexpectedly large drop in weekly inventories.

"I think everybody was taken aback," said Bhushan Bahree, Senior Director, Global Oil for IHS CERA. "Normally they have their differences and they somehow resolve them or paper over them and this just seemed to come apart."

Bahree does not think the disagreement within OPEC or the failure to agree on more production will result in higher prices, as reflected Wednesday in the futures market.

"Once they see that the people who have the spare capacity are promising to produce all the oil that's needed, I don't see what the big concern would be," he said.

Saudi Arabia oil minister Ali al-Naimi called the meeting one of the "worst ever" and immediately moved to assure markets the Saudis would do what it needs to provide adequate supply.

Naimi told CNBC that OPEC production stands at 28.8 million barrels a day, and that he and other Gulf oil producers spent three hours trying to convince members to add 1.5 million barrels to that level. The increase was opposed by six producers, including Venezuela and Iran.

"People are misinterpreting it. There's talk they're falling apart. I think the Saudis backed off in order to hold the cartel together," said John Kilduff of Again Capital. Kilduff had not expected OPEC to agree on increasing output because of opposition from Venezuela and Iran, which now holds the presidency of the organization.

"The raise in production was only going to legitimize current production levels," he said. "The market's overreacting."

J.P. Morgan's Lawrence Eagles, in a note, however, points out that the friction within OPEC also highlights the limited spare capacity of many members, and he questioned whether Saudi Arabia alone can lift output to fully meet demand in the third quarter.

The International Energy Agency said it was disappointed that OPEC members were unable to agree and it urged members to raise supply to meet demand, or run the risk that higher oil prices will undermine the global economic recovery.

Iran's ascension to the presidency of OPEC was also seen as a factor in organization's inability to reach an agreement. Iran's newly appointed oil minister, Mohammad Aliabadi was the head of the Iranian National Olympic Committee and has no apparent oil experience.

The divide at OPEC comes against the backdrop of the Arab spring, which has swept out governments in Egypt and Tunisia and resulted in revolts against the governments of Libya, Syria, Bahrain and Yemen. The revolution in Libya has resulted in much of that country's oil production going off line. Other producers have been making up for the supply.

"I'm sure they'll work it out eventually, but they seem to have a hiccup here," Bahree said. "They'll find their footing again."

Bahree said differences among OPEC members are more difficult when the organization is seeking to reduce output, not raise it. He said there were heated divides in the early 1980s. "At that point, they were trying to protect prices that were falling apart very fast," he said.

He said there was also high tension during OPEC's July, 1990 meeting, when Iraq lined up its troops on the Kuwaiti border, the first trigger for the first Gulf War. At that meeting, OPEC agreed to raise prices and Kuwait and the United Arab Emirates agreed to reduce production as a result of Iraqi pressure.

Questions? Comments? Email us at marketinsider@cnbc.com