Whether the oil price increase will affect the OPEC quota?

The oil price held strong in the second week of 2011, edging close to 3-digit figures and fulfilling many new-year predictions. The economy is still uppermost on everyone’s mind but the US unemployment figures were weak in the recent report, suggesting a slower economic recovery. In early trading on Friday, oil was still priced above US$90 a barrel.

The temporary shutdown of a major pipeline in the US caused concern about supply all week. The Trans Alaska Pipeline originating in Alaska’s Prudhoe Bay had a leak that curtailed production by at least half. The pipeline is operated by Alyeska Pipeline Service Company who took the decision to shut the pipeline to allow time to install a bypass that will bring the flow back to normal. This pipeline supplies around 12 per cent of America’s supply. This situation certainly put pressure on the price.

There’s still plenty of oil on the market and US inventories actually rose last week. The US saw imports increase with more than 400,000 barrels added to the stockpiles. This has been the first time in 6 weeks where inventories actually rose, breaking a trend of decline. Refiners had been using their stored supplies in recent weeks. Distillate stocks also increased by 1.3 million barrels in their third straight week and gasoline stocks were up by 2.8 million barrels. The high oil price and this healthy stock build is another reason why OPEC will not be considering adding more oil to the market in the near term.

OPEC is pumping more than 29.27 million barrels a day, according to energy publisher Platt’s. This production does not include Iraq and its still putting OPEC production higher than in November by 170,000 barrels. OPEC’s agreed quota is around 26.84 million barrels a day, clearly indicating a high level of non-compliance. Platt’s estimates that compliance is now down as low as 52 per cent. As long as oil prices remain this healthy, producing countries have no real interest in curtailing production and sticking to agreed limits. All the oil being produced is not just for export as producing countries find their internal demand growth is also on the rise.

The huge discrepancy between the price of American WTI and the UK’s Brent futures has widened. Brent is trading close to US$100 a barrel with a stronger percentage increase when compared to WTI. The prolonged uncertain state of the US economy keeps pressure on price. “The disconnect between Brent and WTI has been significant,” says Jason Schenker, President of Prestige Economics in Texas. He argues that WTI as a steady benchmark may have outlived its usefulness. “We have argued that WTI is a broken benchmark, exposed to basic risk stemming from localized inventory dynamics.” He even suggests that Brent may be a better measure “for risk management purposes as well as for a proxy of crude oil prices and demand.” Analysts at Credit Suisse say they doubt Brent will pass the US$100 figure in the coming week, citing the fact that the Trans Alaska Pipeline will probably re-open soon.

As the oil price continues to gain strength, the market will put pressure on OPEC to call an extraordinary meeting. This is not warranted according to the newly appointed President of OPEC for 2011 who is also the Iranian petroleum minister. Masoud Mir-Kazemi dismissed the idea of a meeting and claimed that the shift in the value of the dollar demonstrates the real price of oil. He said “The real oil price, based on the purchasing power and value of the dollar in 1970 is around US$11 a barrel.”


Other ministers who have spoken to reporters in the last few weeks say there is no real need for an additional meeting. Kuwait’s oil minister, Sheikh Ahmad Al-Abdullah Al-Ahmad Al-Sabah said he sees no real reason why the organization should meet formally, even if the oil price goes to US$100 a barrel. The Chairman of the Libyan National Oil Corporation also agreed that US$100 a barrel would not hurt the economy, saying many of the upward pressures “are temporary.” The next official meeting is scheduled for June.

While Iraq enjoys no expected limits on oil production in the short-term, the country is still grappling with a state of uncertainty in its provinces. This does not have excess investors lining up, but the oil industry knows it needs to show willing. The giant Nassiriya oilfield needs exploration and development and the country’s Deputy prime Minister for Energy Affairs, Hussain Al-Shahristani said the bidding will be open to international oil companies. A Japanese group, led by Nippon Oil has already been qualified to bid. Iraq plans to increase oil production to meet domestic and international demand. This mainly undeveloped Nassiriya field is said to have reserves around 5 billion barrels.

International energy investors will also be keeping a close eye on opportunities in Nigeria. Shell recently offered various oil assets to the market, namely four big oil fields in the Niger Delta state who’s value could be as much as US$2 billion in total. All companies need to prove that can manage the development of the field. The on shore blocks have attracted interest from Russia’s Gazprom and the UK’s listed Afren.

The first monthly oil market reports of the year will be out next week. OPEC will be the first organization to do so on Monday, followed by the International Energy Agency’s report on Tuesday. Only last month, the IEA lowered its demand forecast by 10,000 barrels a day but still estimated a growth projection of 1.7 percent compared to 2.4 percent growth in 2009. The IEA estimates that the world will consume around 87.78 million barrels a day in 2011. OPEC is being even more cautious on projected growth figures.

While the oil price gets off to a healthy start this year, the growth in the economy will always be the key driver. Schenker says “oil has been on a real tear since the new year.” He says the main drivers right now are “expectations of global growth, financial market exuberance and the pipeline disruption in Alaska.” All of these elements will keep pressure on the market but stronger economic data from the US will be needed to bring sustained strength to the market.

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