Oil prices drop as OPEC decides to raise quotas
By Steven Mufson,
Crude oil prices sagged Wednesday after the Organization of the Petroleum Exporting Countries decided to boost its official production quotas to 30 million barrels a day, about where the group’s actual output has been running.
On the New York Mercantile Exchange, the price of the benchmark West Texas Intermediate crude oil fell to $94.90 a barrel, down more than 5 percent.
Some analysts said petroleum prices could remain relatively high in the coming months as Europe rebuilds its depleted inventories, world demand edges upward and the possibility of conflict with Iran casts a shadow on the global market. But the weak state of the U.S. and European economies and new oil supplies available outside OPEC — attractive at current prices — could also erode the cartel’s efforts.
“As long as oil is above $70 [a barrel], no one will slow down any oil investment,” said Fadel Gheit, oil analyst with Oppenheimer & Co. “It’s still a very lucrative business.”
The 12-member OPEC cartel said the new quota would cover output by all of its members, making room for Libya and Iraq, both of which are still recovering from conflict. OPEC said that as Libya increases its production, other countries — meaning Saudi Arabia — would lower theirs to maintain the ceiling of 30 million barrels a day.
An oil industry source said Libyan production at facilities run by ENI, the Italian oil giant that produced about a third of Libya’s oil before the country’s civil war, would be back to prewar levels by June. Libya produced about 1.6 million barrels a day before rebels toppled the regime of Moammar Gaddafi, but the country’s oil minister said Wednesday that it had recovered up to 1 million barrels a day.
OPEC’s communique said: “Member Countries would, if necessary, take steps (including voluntary downward adjustments of output) to ensure market balance and reasonable price levels.” In addition to balancing Libya’s rising production, that would include adjustments to global economic conditions.
“We are faced with the prospect of a world economy which could swing either way in the coming months,” said Iranian Oil Minister Rostam Qasemi, OPEC’s president.
The cartel did not set quotas for individual nations, as it has in the past, a way of papering over differences and a recognition that Saudi Arabia is the only one with the ability and will to restrict or expand production to stabilize prices. Last week, Saudi Oil Minister Ali al-Naimi said that the kingdom was producing 10 million barrels a day, up from early this year but still below its stated capacity of 12.5 million barrels a day.
“The Saudis have been managing this unilaterally,” said Greg Priddy, a global oil analyst with the Eurasia Group consulting firm.
But the official production quota now covers Iraq. It has been excluded as it tries to boost production to about 4 million barrels a day. Analysts said Iraq’s output is approaching 3 million barrels a day, up substantially.
The biggest uncertainty facing the cartel is the growing tension between Iran and Western powers worried that the Islamic republic might be developing a nuclear weapon. Recent European efforts to tighten sanctions against the country by barring any dealings with Iran’s Central Bank would effectively block Iranian oil exports to Europe. In the United States, Congress is also drawing up tighter sanctions.
Iran exports 2.5 million barrels a day of crude oil, about equal to the amount of spare production capacity — nearly all of that in Saudi Arabia. Cutting off that supply would have a major impact on world prices. Most oil analysts expect the United States to balk at blocking that supply, both because it is an election year and because the U.S. and European economies are still sluggish.
“I really don’t think anyone would do anything to bottle that up,” Priddy said. “It is probably beyond what the Saudis could make up, and even if they could make it up, the lack of spare capacity would cause a pre-spike in and of itself. Ultimately, I don’t think the United States will do anything that would prevent Iran from selling oil.”
Instead, European sanctions could force Iran to reroute its exports, diverting about 450,000 barrels a day away from Europe to Asia and perhaps having to discount its oil slightly. Exports of oil to Asia would reroute an equal amount of supply to Europe.
“Only the interruption of Iran’s oil exports is likely to convince the regime to change behavior on nuclear weapons,” said Robert McNally, an oil expert with the Rapidan Group consulting firm. “But that step will necessarily entail crimping global oil supplies, hurting major imports of Iranian oil by countries like China and Japan, and risking an oil price spike that could damage the economy.”
OPEC supplies about a third of the world’s crude oil. In its most recent forecast, the group said that global oil demand in 2012 would grow by 1.1 million barrels a day to average 88.9 million barrels a day. That’s slightly less than OPEC’s previous assessment because of slow economic growth in Europe and the United States, and the spillover effects in countries such as China and India.
The cartel said that most of the rise in consumption would be met by supply increases outside OPEC, especially from the United States, Brazil, Canada, Colombia and Russia. The forecast said that demand for OPEC crude would increase by only 100,000 barrels a day.