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OPEC may raise oil output limits, restore credibility

Obsolete OPEC quotas in need of revision; Producer group's credibility at stake; May raise overall output limit, country quotas difficult

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May 5, 2011 3:22 by



OPEC is considering raising formal output limits when it meets in June in a bid to convince the oil market it wants to bring crude prices down and reverse the impact of fuel inflation on economic growth. Despite the loss since late February of Libyan supply, the Organization of the Petroleum Exporting Countries sees no shortage of crude on world markets, a view largely supported by data on global inventories which are comfortable.

But some in the cartel see the need for a clear signal OPEC is prepared to take action to bring oil back below $100 a barrel, OPEC delegates said.

“Saudi already made a promise to the U.S. and the rest of the world to keep the oil markets well supplied and kept that promise by increasing production above quotas,” said a Gulf delegate.

“But this doesn’t seem to have an impact on the price, so I think OPEC may consider raising production as a psychological factor that would help prices come down.”

DEMAND RATIONING

Evidence is mounting that high oil prices are dampening the recovery in the West, in turn holding back fuel demand.

“OPEC seems to have somehow resigned from playing an active role in price formation, leaving it up to the market, including speculative players,” said Pierre Terzian of consultancy Petrostrategies. “In the long run OPEC will be the most affected by the impact of high prices on demand.”

Leading producer Saudi Arabia has become increasingly frustrated that, despite its unilateral efforts to pump more to replace lost Libyan production, prices have stayed high near $120 a barrel for Brent.

Riyadh is among those in the organization that decided an emergency OPEC meeting was not warranted to address the Libyan outage, perhaps undermining the cartel’s credibility as a cohesive unit. Last week’s intervention by U.S. President Barack Obama, calling for action on fuel prices, was seen among OPEC countries as domestic U.S. politicking but it has added pressure on those in OPEC friendly to Washington, led by Saudi Arabia, to be seen to be doing something.

An increase in formal output could be accompanied by an update to OPEC’s system of allocations, known as quotas, per country that has not been altered since the end of 2008.

“I think that the existing OPEC quota system is obsolete. An updating of OPEC quotas and compliance would certainly improve the credibility of the organization,” said Terzian.

QUOTA QUARRELS

OPEC cut quotas sharply, effective Jan. 1, 2009, to combat a drop in demand as recession bit, but has since left those formal targets unchanged, which has resulted in a large discrepancy between official and actual output.

Instead, Saudi Arabia has taken the lead in balancing the market, raising output sharply in February to fill the gap left by the loss of Libyan supplies and cutting it again since as global demand growth eased.

Most of the rest of OPEC are pumping at or near full capacity for supply of a total estimated 25.79 million barrels daily in April from 11 members with output targets, compared with an official limit of 24.84 million bpd.

Largely because of the outage from Libya, production from the 11 — excluding Iraq which is not restricted under OPEC’s output policy — is still a million barrels a day below its peak of 26.81 million bpd in January.

While Saudi Arabia has struggled to sell much of its replacement crude blend to fill the Libyan gap, the million-bpd shortfall versus January may also reflect the damage being done to demand by the impact of high prices on the economy.

Re-establishing OPEC quotas at the core of the group’s production policy is not likely to be simple and arguments over who should get what will make it difficult to establish realistic individual quotas by country.

That might mean an agreement simply to raise the combined target for the group as a whole.

“At this point we don’t even know who will be representing Libya and going and changing every country’s quota might prove to be a very difficult task,” said another Gulf delegate.

Price hawk Iran may prefer not to raise output at all.

Iran argues that current prices are “logical” and that adding volumes won’t make any difference because of political and psychological factors in the market. (Editing by Anthony Barker)

By Amena Bakr and Richard Mably



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