Sunday, October 19, 2008

OPEC quotas

In response to the rapidly falling price of crude oil, OPEC has called an 'emergency' meeting for this week, a month earlier than planned. Actually, two months early, since the November meeting was rescheduled not long ago from December.

Here are some charts showing what OPEC has actually been producing versus their quota levels.

This first chart contains only 9 of the 13 OPEC countries. Not included are the following:

Iraq - has no assigned quota.
Angola and Ecuador- these countries have only had quotas assigned since January. There have been no official changes to OPEC production quotas since then.
Indonesia - has been a net importer for years, has been producing far under its quota for years, and is leaving OPEC in January. Indonesia will not be included in any of the data contained in these charts.

This is what happened in the chart above: OPEC made two cuts of 1.2 mbpd in November 2006 and 500,000 bpd in February 2007. Those cuts remained in place until the September 2007 meeting, at which OPEC decided to raise production by about 500,000 bpd. So why does the raise look like it makes up the entire 1.7 mbpd that was originally cut? This is because OPEC finally decided to get partially serious and base their decisions on what was actually being produced by member countries instead of on their quota numbers. The result was to come up with new "production targets" which were composed of an equal distribution of about 500,000 bpd over July 2007 production numbers.

There are some interesting stories here, but the bottom line is this - the two countries who are most frequently labeled "price-hawks," Venezuela and Iran, have not been carrying their weight for the last few years when it comes to managing production levels. It is well known that Saudi Arabia is the lone, real swing-producer in the group, but Iran rarely alters its production significantly and Venezuela chronically underproduces its quota.

I think it can be generally assumed that the UAE, Kuwait, and Qatar (as solid allies of both the West and Saudi Arabia) fall in line with "what is expected from the team" as they say in auto-racing. Algeria and Libya might also be included in this group, however, the production levels of all these countries combined only equal Saudi's.

More and more it seems that OPEC quota/production changes are an attempt by Iran and Venezuela to get Saudi Arabia to lower its production. It doesn't appear that either has the ability to increase its production for various reasons and lowering production only means they bring in less dollars than they could if Saudi Arabia did more of the heavy lifting.

There are a few interesting things to note here (shown clearly in the chart):
1) OPEC seems to anticipate quota changes by a number of months and begin to react in that direction. Or maybe this is just the Saudi group acting on its own.
2) OPEC almost always cheats as a group. They over-produce by 500,000 bpd.
3) (Not clear from this chart, but you can see where it happened) When OPEC hit its low in the summer of 2007, Saudi Arabia was on target at its quota of 8.6 mbpd. Which means that all the cheating at that point was being done by the other 8 countries. Of course, after the quota had been raised Saudi was doing most of the cheating, producing as much as 800,000 bpd over their quota in July and August.

OPEC Plans to Cut Supply as Oil Prices Head Toward $50 a Barrel
By Grant Smith and Margot Habiby
Oct. 20 (Bloomberg)

OPEC, the supplier of more than 40 percent of the world's oil, plans to cut output for the first time in almost two years as the worst financial crisis since the 1930s sends crude toward $50 a barrel.

Options contracts to sell oil at $50 by December soared 28- fold in the past two weeks on the New York Mercantile Exchange. Goldman Sachs Group Inc. and Merrill Lynch & Co. analysts say crude, which fell more than 50 percent from a record high in July to $71.85 a barrel last week, may drop another 44 percent should the world economy slip into a recession.

The Organization of Petroleum Exporting Countries, which meets Oct. 24 in Vienna, three weeks earlier than planned, is facing the weakest growth in demand since 1993 just as new fields come on line from Angola to the Gulf of Mexico.

``OPEC is going to try to prevent some of the price decline,'' Francisco Blanch, head of global commodities research at Merrill in London, said in a Bloomberg television interview. ``It's going to be very difficult to stem a price fall.''

Options contracts that allow holders to sell 1,000 barrels of oil for $50 each by December closed at $280 on the Nymex on Oct. 17, up from $10 on Oct. 3.

Even at today's prices, Venezuela and Iran, two of the organization's 13 members, may struggle to balance budgets because they rely on energy sales for more than half of their revenue, according to estimates compiled by the U.S. Central Intelligence Agency.

GDP Down 25%

``Some countries like Venezuela and Iran need prices above $80 a barrel,'' said Leo Drollas, deputy director of the Centre for Global Energy Studies, a London-based consulting company. ``The Saudis have a bottom price of about $65 a barrel, but they might go ahead with a cut to keep solidarity within OPEC.''

Gross domestic product in the six-member Gulf Cooperation Council of Saudi Arabia, United Arab Emirates, Kuwait, Oman, Qatar and Bahrain would shrink 25 percent if oil averaged $50 next year, ING Bank NV estimates.

Ministers from Algeria, Libya, Iran and Venezuela already called for a reduction in supplies from the current quota of 28.8 million barrels a day. OPEC President Chakib Khelil, who is also Algeria's oil minister, said on Oct. 16 the ``ideal'' price for crude is between $70 and $90 a barrel. A week earlier he said OPEC is ``very likely'' to lower production.

Qatari Oil Minister Abdullah bin Hamad al-Attiyah told Al Jazeera TV the cut will likely be 1 million barrels a day, or 14 percent more than his nation pumps. Saudi Arabia, which dominates OPEC proceedings as the group's largest producer, has yet to comment on its intentions.

Reducing Estimates

While OPEC already agreed to curb production by observing output quotas after a Sept. 10 meeting to lower supplies by 500,000 barrels a day, members routinely pump more than their allocation, according to data compiled by Bloomberg. Since that session, Credit Suisse Group pared its forecast for oil next year by 32 percent to $75 a barrel. Deutsche Bank AG cut its 2009 assessment by 23 percent to $92.50 on Sept. 29. BNP Paribas SA lowered its outlook by 18 percent to $92.50 on Oct. 10.

At the same time, Exxon Mobil Corp.'s Saxi-Batuque fields off Angola's shore started pumping in August, while BP Plc's Thunder Horse field in the Gulf of Mexico is scheduled to increase supplies by the end of the year. World oil capacity will rise 1.45 million barrels a day in 2009, twice the rate of growth in demand, according to the International Energy Agency.

``Prices could fall as low as $50 a barrel during the fourth quarter if OPEC can't find a way to offset the financial meltdown,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.

The prospect of OPEC cuts, slowing economic growth and falling prices drove the Dow Jones Europe Stoxx Oil & Gas Index down 25 percent in the past five weeks. Irving, Texas-based Exxon Mobil, the world's biggest oil company, fell 37 percent this year, while The Hague-based Royal Dutch Shell Plc, the second- biggest, lost 33 percent.

$4 Gas

OPEC lowered its forecast for demand in 2009 last week, saying consumption will be 450,000 barrels a day less than expected at 87.21 million a day. The Paris-based International Energy Agency shaved its 2009 outlook the previous week and said this year's demand growth of 0.5 percent will be the weakest since 1993.

U.S. motorists are driving less after gasoline pump prices topped $4 a gallon in July. Vehicle-miles traveled on all U.S. roads that month were 3.7 percent lower than a year earlier, Federal Highway Administration data show. Prices fell to an average of $3.21 a gallon last week, according to the Department of Energy.

Output Cut

As demand declined, OPEC trimmed supplies 3.8 percent to 31.8 million barrels a day in September, according to Geneva- based tanker-tracking service PetroLogistics Ltd. Saudi Arabia's volume fell 520,000 barrels a day to 9.18 million, PetroLogistics said.

``This may be OPEC's toughest balancing act in their history,'' said Tetsu Emori, the fund manager at Astmax Co. in Tokyo, Japan's biggest commodities asset manager with $200 million under management. ``By the time OPEC announces a cut, they would be hoping to have seen the bottom of the price.''

The last time OPEC slashed quotas was at a December 2006 meeting in Abuja, Nigeria. That 500,000 barrel-a-day cut took effect in February 2007 and followed an earlier, 1.2 million- barrel reduction in October 2006. Those actions were reversed later in 2007 as prices rallied.

``The situation has gotten dire enough that they're willing to move and even become a topic of conversation'' during the U.S. election campaign, Ronald Smith, chief strategist at Alfa Bank in Moscow, said in a Bloomberg television interview. OPEC will cut by 1 million barrels a day ``at the very minimum'' and potentially ``wait until after the election, then add another million on top of it, or half a million,'' he said.

The Last Time OPEC Raised Production Targets

OPEC on Sept. 14 published a table on its Web site showing individual member production targets. The OPEC Secretariat removed the table after Venezuela protested that the published table wasn't official. (2007)

The Disappearing Table

August New allocation Change
output from Nov 1
Saudi Arabia 8,616 8,943 327
Iran 3,869 3,817 -52
UAE 2,573 2,567 -6
Kuwait 2,446 2,531 85
Venezuela 2,358 2,470 112
Nigeria 2,145 2,163 18
Libya 1,710 1,712 2
Algeria 1,354 1,357 3
Indonesia 839 865 26
Qatar 821 828 7

Total 26,730 27,253 522
(All figures in '000 barrels/day)


Anonymous said...

It will be interesting to see how 2 oil sources outside of OPEC will perform: 1. canadian oil sands; and 2. Mexico.

Production costs for canadian oil sands are significantly higher than conventional oil so a lower oil price will negatively affect production. Mexico's oil production and oil exports are in serious decline putting added pressure on the United States to find alternative supplies.

Tim said...

Hi. Love the site. Very useful and well-edited.

I have a question about the 2007 consumption figures in the Sept. 26, 2008 version of the spreadsheet. The sheet sources those figures to the EIA for Nigeria, Libya, Iraq, Angola, Oman and Equatorial Guinea. I can confirm your consumption figures up through 2006 in the first excel file on this page, i.e. "Selected Countries, Total OECD, and World Total, Most Recent Annual Estimates, 1980-2007". However, the figures for 2007 are not included in that file, or any other EIA file that I can see. Can you please give me the source for those numbers, or did you extrapolate them?

Anonymous said...

I will write a small post to explain consumption extrapolation.

I will also address Oil sands and Mexico.


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