OPEC Shifts Operational Standards

OPEC ShiftsOPEC has shifted its operational standards amidst a bit of infighting. The Organization of the Petroleum Exporting Countries is seeking a new balance in the constantly changing political atmosphere in the Middle East. Currently the oil cartel is holding production down and adopting a wait-and-see attitude in the wake of Iran’s nuclear agreement with the West. In as little as six months, if all goes well, Iran’s sanctions may be eased a bit more to allow the country to raise its daily production cap. Current sanctions are costing the country just in oil production alone.

However, there is a bone of contention between Iran and Iraq. Iran accused Iraq of increasing production at Iran’s expense; in essence, taking over their share of oil production. With the coming OPEC meeting, high on the agenda will be whether Saudi Arabia and Iraq will need to cut back to allow Iran to increase its production to meet world needs. Also the matter of the U.S. increasing its production has to come into consideration. The 12 nations, the largest producers of oil that make up OPEC, have a history of squabbling among themselves but have kept overall production down to 30 million barrels a day.

Saudi Arabia, on the other hand, wants to amp up production. Ali al-Naimi, Saudi’s oil minister, scoffs at the idea of reducing oil production to accommodate other sources. OPEC shifting operational standards in reaction to a perceived decline in demand seems to him to be a bit pessimistic. He maintains, “The market is in the best situation it can be. Demand is great, economic growth is improving, so what more do you want?”

OPEC meets twice a year to determine market goals, depending on previous production standards. One thing they want to maintain is at least $100 a barrel which they need to balance their budgets. Crude has been hovering around $108 for the past few years. Prices have jumped a bit though, since the release of US production data. The general consensus is that growing US production may well cut into OPEC’s share of the market. Also, they may need to take into consideration Iraq’s growth as they continue to recover from the US invasion of 10 years ago.

Zangeneh, Iran’s new oil minister, has openly criticized Iraq’s essentially taking over Iran’s oil production, claiming it to be very unfriendly to fill Iran’s market demands. What will Iraq do should sanctions be lifted and Iran be allowed to increase production? How will the other OPEC nations react?

Currently, Iran is producing below sanction limits, but their return to the market should those sanctions be lifted could spark a debate on who should cut back. Saudi Arabia, the United Arab Emirates, and Kuwait, combined, produces more than half of OPEC’s output and may be urged to do so. That, of course, is in direct opposition to Saudi’s oil minister Naimi’s wishes and views. He believes there is enough demand for them all to fulfill. In the meantime, OPEC shifts operation standards to maintain a self-imposed cap of 30 million barrels of crude a day.

By Lee Birdine

Financial Times

Reuters

 Wall Street Journal

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