Six months on after the last meeting, OPEC can relax for a while longer. Contrary to expectations, the price of oil has remained over the $100 level for the OPEC Basket and for Brent Crude. However, behind the scenes geo-political tension and unrest in many of the producing countries has maintained pressure on the price and in particular because the so called come-back from both Iran and Libya has not happened and in spite of hope that sanctions would be relaxed sufficiently for Iran to resume higher output levels and that the cessation of internal conflict in Libya would open up the oil flow again, neither has happened adding to the support.
Unrest in Nigeria over the lack of response from President Goodluck Jonathan to actions of Boco Harem and accusations of mis-management of oil revenues will curtail export potential there. Not to mention the continued civil war in Syria as well as a lack of progress in Middle East peace activity will further impact the oil price, although reduced tension between Ukraine and Russia has had a moderating effect.
Meanwhile, OPEC’s spare capacity continues to wane and as domestic demand increases in all producing countries they are struggling to maintain output for both exports and domestic consumption. However, the real problem is that domestic consumption is highly subsidised and in some instances provided free, resulting in producers having to build the subsidies into the overall production cost and as the populations continue to increase so too will demand. Furthermore, in the aftermath of the initial “Arab Spring” I think it highly unlikely that subsidies will be curtailed in the short term, if ever.
Looking ahead, the IEA has warned that demand will increase and I am confident that Saudi Arabia will, as always, discreetly increase production to cover any losses from the shortfalls of others and certainly with prices being maintained over the $100 level for the rest of the year. So, for this meeting there will be no change, but beyond that I foresee problems for OPEC as domestic demand impinges on exports and forces costs up further. By then, US production should have increased further and similarly from Russia assuming a resolution over Ukraine. As a consequence, the next OPEC Meeting in December could turn out to be one worth waiting for!
