When OPEC decided on the production quotas By MERLIN FLOWER for OIL-PRICE.NET, 2010/03/25

OPEC production quotas as expected

Without giving any room for surprises, OPEC has agreed to keep the production quotas unchanged this time too. Meeting in Vienna on March 17, this is the fifth time since 2008 that the output levels have been kept unchanged. The oil cartel expects the emerging markets to absorb the oil output, and help maintain their goal of a 'healthy crude price'.

As members do wrestle around by overproducing, calls were made to stick to the production cut agreements made in 2008. OPEC has 12 member countries and the twelfth member Iraq doesn't come under the production agreements. However, this adherence to the production quotas isn't as easy as it seems. Recent statistics from the OPEC stable show that the compliance of the members hinged at about 53 %. That is, OPEC is, in fact, producing more oil than the market needs. To be specific, OPEC is producing about 2 million barrels a day more than the official production cap of 24.845 million barrels a day. Non-OPEC oil output stands at 51.5 million barrels a day.

Angola and Nigeria have standing request with the OPEC to increase their quotas. The current production quota of Angola is at 1.65 million barrels per day. And, the oil minister did accept that his country was producing more oil than the permitted quota-production output is at 1.75 million barrels per day-for the reconstruction programme in his country. The country has potential to produce 2 million barrels of oil per day and is the largest producer of oil in Sub-Saharan Africa.

Though officially Nigeria hasn't asked for increase in production quotas, the country wants its output quota raised, as the present target was made when braving militant attacks on oil fields. "We are hopeful that when the time comes this will be looked at on its merit and an adjustment will be made. In the meantime we are having to do the best we can with what we have" said Oil minister Rilwanu Lukman.

OPEC has so far kept the issue on the sidelines; this time too it was no different.

Why the status quo on the production quota was as predicted?

That was by judging the reactions prior to the meeting. Just before the meeting, the Saudi Arabian Oil Minister Ali Naimi was quoted saying that OPEC would agree to leave the production quotas unchanged. He had said that his country would provide more oil if there was 'genuine' demand. Iranian oil minister Masoud Mirkazemi said, "OPEC should not take any decision to change production". Similar sentiments were echoed by Rafael Ramirez, his Venezuelan counterpart.

On the price of oil

Oil prices have increased by almost 15% since OPEC's last meeting in Angola where the production quotas were kept unchanged. In 2008, there were output cuts when oil prices fell from the $147-a-barrel and when the demand dropped with the onslaught of the economic crisis. And, since December 2008 the production targets have been kept unchanged.

On the face of it, OPEC is comfortable with the price range between $75-85 a barrel. Anything above this, the cartel feels, would harm the economic recovery, while low prices would lead to underinvestment. The cartel accounts for about forty percent of the world's oil. The oil prices rose after the news, reaching $82 a barrel and on the back of a weak dollar. And, some countries expressed concern over the rise in the price of oil. Angolan Oil Minister Jose Maria Botelho de Vasconcelos said that prices between $80 and $90 were good while $90 would be too high. Algerian oil minister, Chakib Khelil expects the crude prices to oscillate between the $75-$85 ranges for the rest of the year. Since the demand for oil in the U.S. is still low, Iran and Venezuela are happy with the present price.

Demand for oil

The IEA estimates the world demand for oil in 2010 to increase by 70000 barrels a day to 86.6 million barrels a day, with growing demand from Asian countries. This is an increase of about 1.8 percent from last year. Goldman Sachs has forecast demand at 86.6 barrels a day. Banks like Bank of America, Merrill Lynch, Goldman Sachs and Société Générale have optimistic forecast of recovery for demand this year.

In addition, Barclays Capital and Goldman predict fall in Non-OPEC supply due to underinvestment and decline of mature fields. Some spotlights from OPEC Monthly oil market report

• The world's oil demand is expected to grow by 0.9 mb/d this year, compared to the contraction of 1.4 mb/d last year
• For the OECD, growth in the U.S. has been lowered to 2.4%
• Oil demand from OECD is expected to remain negative with growth at around 0.15 mb/d-OPEC
• The demand for OPEC crude has declined by 2.2 mb/d compared to 2009, averaging 28.9 mb/d. The demand in 2009 was 29.0 mb/d

But, demand in the U.S. continues to be dreary with the IEA expecting the demand in the country to remain flat at 18.8 million barrels per day. If the world demand stays at the present pace, there may be surplus of oil in the market as OPEC output levels are at 29.35 million bpd-as noted earlier- while demand for it is lesser. If demand increases in the U.S., OPEC will have to increase the quotas to balance the supply. Not to forget, countries like Saudi Arabia Kuwait, Qatar and the United Arab Emirates could increase production if needed.

Meanwhile, OPEC has plans for additional 12 million barrels per day by 2015. If that does materialise and if the demand stands at the present rate, there would be more oil in the market.

Quote for the day

"Good demand, reliable supply, beautiful prices - we are very happy." Ali Naimi, Oil Minister, Saudi Arabia.