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What will OPEC decide at its next meeting?

Published Wednesday, June 6th, 2012

With the next OPEC meeting around the corner it is worth having a look at the cartell’s production level and at what to expect from the meeting.

Current production is around 31.8 mbpd, the highest since 2008. Saudi Arabia is said to be producing over 10 mbpd. This increased production is partly responsible for the recent price slump in oil prices. If OPEC continues to produce at this rate for the rest of the year, global oil stocks will increase by around 1.1 mbpd in 2H 2012 provided demand estimates stay at the current level of 90 mbpd.

Saudi Arabia can easily weather the recent $30/bbl fall in oil prices. The IMF sees the fiscal break-even price for the Kingdom at $71/bbl. (Kuwait has the lowest fiscal price at $44/bbl.) OPEC members that are hurt most by the recent fall in oil prices are Iran and Lybia  ($117/bbl),  Iraq ($112/bbl) and Algeria ($105/bbl). It is therefore logical that these producing countries will do everything they can to convince OPEC to cut back production and support prices.

Whether it will happen remains to be seen but it would probably come as a surprise of OPEC officially reduced its oil output for the next few month. An indication that they will stick to current levels comes from Kuwait that is reported to supply full crude oil volume to Asian customers during the July-September period.

Whilst keeping production at the current level is not viewed as bullish, ironically it could support oil prices in the medium term. Geopolitical tension between Saudi Arabia and Iran would not go unnoticed by oil market participants and would likely have the risk premium increased.

Posted by Tamas Varga

Tamas Varga has been in the oil industry since 1992 and with PVM for 18 years. During his time in the industry he has gathered a range of experience in the oil markets. At PVM Tamas is in charge of data collection and analysis.

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