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OPEC nations to keep oil target unchanged

Thursday, 29 November 2012 - 5:45pm IST | Place: London | Agency: Reuters
Gulf Arab countries to make any output changes informally even as demand for OPEC oil in 2013 to drop 400,000 billion barrels a day.

High oil stockpiles, slowing demand growth and a fragile world economy would usually give Organization of the Petroleum Exporting Countries (OPEC) reason to consider supply cuts when it meets next month, especially when some think they may be pumping more than enough to meet demand. But with turmoil in the Middle East keeping the price of oil well into triple digits, OPEC delegates say the 12-member group is expected to stick with an output target of 30 million barrels per day (bpd) agreed a year ago.

They also hope the OPEC will contain tension over sanctions on Iran that have seen Tehran's output plunge and led Saudi Arabia and Gulf Arab allies Kuwait and the United Arab Emirates to turn up the taps. Indications are that Iran, under tightening US and European sanctions over its nuclear work, is resigned to dramatically lower exports and will fly under the radar at the December 12 meeting in Vienna.

"OPEC is facing a difficult year ahead. The world economy is weak and supply will be running ahead of demand, which could justify a cut of around 500,000 barrels a day," said a senior OPEC delegate from a Gulf producer.

"But political factors will prevent OPEC from taking any formal action." With changes in the output ceiling unlikely, oil market management will be guided by OPEC's leading producer Saudi Arabia - the only member with significant unused capacity - supported by the UAE and Kuwait. Riyadh has already pulled back from 30-year-high rates of 10 million barrels daily, pumping about 9.7 million bpd in October. That has helped lower overall OPEC production by some 700,000 bpd from its peak earlier this year near 32 million bpd.

The numbers alone suggest OPEC's supply surplus could build up next year and may indicate modest curbs are needed. Oil inventories in industrialised countries have risen to 59.6 days of future demand in September, according to the International Energy Agency, significantly above the fiveyear average for the first time in 2012. OPEC is pumping about 1 million bpd above the 30 million bpd output ceiling.

Demand for OPEC crude is set to drop next year by just over 400,000 bpd as the United States, enjoying a shale energy boom, and other non-member countries expand supplies. But lower Iranian exports, oilfield outages from the North Sea to Nigeria and concerns of wider disruption to Middle East supply have outweighed lacklustre demand due to Europe's debt crisis and a slowing Chinese economy, keeping oil above $100 a barrel for most of 2012.

"You have tension in Gaza, Syria, Iran, Egypt - all over the Middle East - that's keeping the price high," said a delegate from another Gulf OPEC country. "Is there an over-supply? Yes, there is. Do we want to keep this over-supply for the time being? Yes we do, until things become clearer." Brent crude has averaged $111.89 so far this year, putting it on course to exceed the record annual average of $110.91 set in 2011, and well above Saudi Arabia's preferred level of around $100.

"On the production front, it is going to be the same story - keeping the 30 million bpd production level and the members will basically produce what they want," said Paul Tossetti, senior energy adviser at PFC Energy. "The (Gulf) countries are producing at high levels and as long as prices hold, why would they want to cut production?"

Saudi-Iran Tension
While many in OPEC appear relaxed about the market outlook, there is tension under the surface. Tehran was angered by a rise in Saudi output to 10 million bpd earlier in 2012 that helped to cushion the impact of the sanctions on Iran by helping to bring prices down from a 2012 high of $128 in March. Iran, traditionally OPEC's second-largest producer, has seen its output sink to around 2.7 million bpd, the lowest in two decades. Iraq, benefitting from an expansion in export capacity, has overtaken its long-time rival, as has Kuwait.

An Iranian oil official, asked if Iran was concerned about other OPEC members taking its market share, indicated Tehran had no stomach for a fight with Saudi Arabia and was not calling for a cut in output. "When I compare the different forecasters, they are forecasting the same demand volume. Also the non-OPEC supply will be about the same. Therefore it seems next year's market situation will be about the same as this year," the official, who declined to be identified, said.

The contrasting fortunes of Iran's and Iraq's oil industries, as well as waning output in other members such as Algeria are expected to hinder any move towards dividing OPEC's 30 million bpd target into individual shares, or quotas. Ministers are also expected to try to appoint a secretary general to replace the outgoing Abdullah al-Badri during talks at OPEC's Vienna headquarters.

Badri, a Libyan, completes his term at the end of December. Saudi Arabia, Iran and Iraq have appointed candidates to succeed him, and the group has been deadlocked all year over who should do so. The candidate from a fourth member, Ecuador, has withdrawn, an OPEC source said. In the absence of the needed consensus on a new candidate, delegates have raised the possibility of temporary moves such as rotating the job around the members for shorter terms, as used in the past, or even asking Badri to stay on.

(Additional reporting by Amena Bakr in Dubai)


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