Commodities Update: OPEC Split Below The Surface‏

As widely expected, OPEC kept its output target unchanged at 30.0mb/d at its biannual meeting in Vienna. While OPEC members continue to produce somewhat more than the long-standing (since December 2011) collective quota suggests, most members are satisfied with a price of Brent crude trading just above USD100/bl, albeit OPEC secretary general El-Badri stressed that the cartel has ‘no formal target for oil prices’. Various oil ministers have hinted that USD100/bl is a price good for ‘both producers and consumers’ and that the market is stable, suggesting there is an appropriate balance between supply and demand. Oil markets reacted very little to OPEC messages, and Brent is stable just off USD102/bl; still, a range of key issues surfaced in relation to the meeting.

First, how should OPEC deal with lower demand for its crude resulting from the rise in U.S. oil production due to the shale drilling boom? So far, OPEC officials have been relatively complacent about the renaissance that the U.S. oil market is experiencing currently. However, until recently, U.S .crude has been largely locked in the Midwest due to a congested pipeline system, and is thus not available to refineries/consumers. However, recent improvements in inland oil infrastructure have meant that U.S. imports, notably of African crude have stalled. This is increasingly felt in countries such as Nigeria, Angola and Algeria, which produces a light-quality crude that U.S. refiners have traditionally been happy to take in. At today’s meeting the Nigerian oil minister Alison- Madueke said that ‘rising U.S. shale output is a concern’. OPEC head El-Badri indeed said that the cartel will study the ‘magnitude of shale oil supply’ and whether this is ‘sustainable’. In other words, some members are increasingly worried that shale will crowd out demand for their crude.

Second, in a sign of the split within OPEC, the cartel failed on Friday to approve criteria for el-Badri’s successor as secretary general. El-Badri was given a term extension last December and will need to be replaced at OPEC’s next gathering on December 4 this year. The cartel confirmed that the three candidates put forth by Saudi Arabia, Iran and Iraq remain in play. Iran wants OPEC to produce less to keep prices elevated, given that the country has had its export volumes reduced markedly by sanctions. Iraq wants to be allowed to increase production to levels that its reserves justify. Also, the Saudis want a stable oil price – and while demand for their relatively heavy-sour crude has yet to be impaired by developments elsewhere they might secretly be starting to worry about the eventual impact of the U.S. oil boom on the world market.

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