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Crude compromise

13 December 2011 By Una Galani

A torn and divided OPEC is unlikely to tighten its ever loosening grip on the oil market at its summit this week in Vienna. But it might try to paper over the deep differences between its members by pretending to agree on a deal that would mostly consolidate the current status quo, leaving oil markets guessing as to the organisation’s strategy – if there is one at all.

The oil cartel is currently producing more than 30 million barrels per day, or 22 percent more than its official output targets, set three years ago. Price-dove Saudi carries the bulk of the spare production capacity and has been pumping more to offset supply disruption from Libya. But all the organisation’s members – except, for obvious reasons, Iraq and Libya – are breaking their individual targets.

Yet OPEC supply is around the levels of demand for the cartel’s crude, judging by forecasts for 2012 from the International Energy Agency. And a decision by the oil cartel to cut supply is unlikely given fears over the health of the global economy.

In theory the best outcome of this week’s meeting would be for OPEC to give up on the fiction and adjust its targets to reality, raising them to its actual output level. It would reinforce the organisation’s credibility, but that looks difficult to achieve. Fixing new limits for each country is tricky. And hawks like Iran – which is presiding over the meeting – would first insist that Saudi Arabia cut down its production.

OPEC could also formally agree to sticking to its existing target of 24.8 million barrels per day. Actual production is then unlikely to change, because most members will want to continue to capture the benefit of current high prices. But few producers beyond Saudi have the ability to pump more.

Finally there’s still the possibility that OPEC fails to reach an agreement altogether. This would suggest deep divisions on the macro-economic outlook from the producers of around one third of the world’s crude. Crucially, it would also reinforce fears that tensions between Shi’ite Iran and the Sunni-ruled Gulf Arab States, magnified by the Arab Spring, may escalate in a way that could disturb markets. So a crude agreement may be better than none at all.

 

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