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Murky Waters: Is Saudi’s increased supply sullying OPEC stability?
With a deadlock decision at last week’s OPEC, Saudi’s increasing output, no matter what. That’s got us feeling like there’s more to the GCC’s story of keeping inflation at bay.
June 12, 2011 2:41 by Precious de Leon
As the world’s largest oil supplier, Saudi Arabia usually gets its way during OPEC meetings. But in its last meeting, OPEC did not sway towards Saudi preference. And, interestingly, this is also the first time in decades that OPEC has actually failed to reach a consensus.
And now even with the 7-4 vote, Saudi has decided to go ahead with boosting output regardless of the OPEC outcome. (Actually, the Kingdom has been increasing output even before the meetings were well on its way, as Kipp has reported here, here and here.)
How crucial was that meeting then, to validate Saudi’s proposal to increase production?
Now in reports that allude to politics creeping up in the Organization of the Petroleum Exporting Countries, Saudi oil minister Ali Al Naimi has always strongly stressed that “Saudi Arabia over the last 16 years or so have worked very, very hard to depoliticise OPEC…We have succeeded and I think today OPEC is more or less an economic organisation, not a political one.”
In humble Kipp’s opinion, OPEC members can take politics off the table as much as journalists can really say they are objective when writing news—in that it can only really be done with a certain acknowledgement that it’s never going to be 100 percent unbiased.
So forgive Kipp, if we’re going to say that after two Gulf wars, the Iraq-Iran war and the Arab Spring going on, the OPEC voting results are hardly unaffected by the Middle East’s current political landscape.
HOPES FOR HIGH DEMAND
One of the contentions is the forecasts on oil demand. Gulf countries predict demand will increase, while the others say demand isn’t really there.
Guess what? According to Reuters, OPEC Vienna HQ puts demand forecasts in the second half of the year at 1.7 million bpd higher than current output. This figure is in the same range as expectations put forward by Saudi Arabia when it proposed increased production.
So why the contention if the figures say output should be increased?
Well, in Kipp’s experience, for every research figure, there’s another research figure to completely counter it. And that’s exactly what’s happened at OPEC. Those proposing to keep the current output (and therefore keeping prices up in the short term), have been presenting figures that show increasing output will be unnecessary as there is no increased demand foreseen.
LITTLE TO NO INTEREST ON THE EXTRA OIL
Currently however, by the looks of it, they’re not exactly cooking up these figures either. There have been reports that despite Saudi pushing its increased output to buyers, demand just isn’t there. The Kingdom’s spare capacity is mostly heavy crude and is of little use for simple refiners who need lighter grade to substitute Libya’s high-quality output.
And according to a Reuters report last week, only a few refiners are interested in buying more, with most of them already having “covered their needs and declined the Saudi offer” for more barrels.
“The question when they talk to customers is that there is no shortage of oil in the market, and even if they tell them more is available, the additional volume they may take is small,” said an industry source familiar with Saudi oil policy.
But then of course it’s only June. There’s still two weeks before the second half of the year. A lot of things could happen between now and then…maybe the demand will go up as the Kingdom has expected. They must have a valid reason beyond what Kipp knows for choosing to increase output.
Kipp’s a little puzzled, though. Why, after an unresolved OPEC meeting, has Saudi decided to go at it alone anyway and increase production without OPEC’s full support? This decision no doubt doesn’t help quell rumours that an OPEC split is imminent. If votes don’t count and members do what they want anyway, then what’s the point, right?
What Kipp means is that’s what checks and balances are for. Members vote and then decisions are made based on that tally. With OPEC unable to reach a decision, Iran has offered to host a meeting in October, which Saudi then declined and the next OPEC meeting remains scheduled only all the way in December.
In any case, Kipp believes the Kingdom is only moving according to what they know to be true in terms of what might possibly happen at the end of the year to increase demand. To what those factors are, Kipp, like the rest of you, will just have to hold on to the edge of our seats until all is revealed.
For now, 2011 is clearly the year of the ripple effect. And Kipp, like the rest of you, are all just hoping we come out surfing on top of these waves.