OPEC published its first Monthly Oil Market Report (MOMR) of the year yesterday. There were only very minor adjustments to the previous forecast. OPEC puts the call on its crude for 2012 at 30.1mmbd, flat on 2011 and about 0.1mmbd higher than its last report. However, the MOMR puts OPEC crude production for December at 30.8mmbd, an increase of 0.2mmbd MoM, based on secondary source estimates. Essentially, that was driven by an 0.2mmbd increase in production from Libya to 0.8mmbd. Production from the other Gulf Cooperation Council OPEC members also increased across the board MoM, apart from a negligible reduction from Qatar; that increase was offset by what to us look like operational reductions elsewhere.
While it could reasonably be argued that there has not been time for OPEC members to react to the new 30mmbd overall crude production target set at the meeting on 14 December, nevertheless the MOMR adds to the evidence that the market is starting the year in an oversupplied situation, for the first time in two years. With Saudi Arabia having increased discounts for its crude sales to Europe and Asia for February, and Libyan production reportedly at 1.0mmbd, there is little indication that OPEC crude production is likely to fall over the next couple of months, and it might increase, we believe, absent untoward events.
Although Iran’s current threats to the Strait of Hormuz are supporting the oil price, in our view the likelihood that Iran will turn threat into meaningful action is low because of the penal consequences it would face if it did. Also, the ‘Tanker War’ of 1984-88 demonstrates that it is possible for reasonable oil prices to coexist with quite high levels of armed action in the Strait, provided markets are comfortable that supply will be available. The Tanker War culminated with Operation Praying Mantis, in which Iran suffered a major naval defeat by US forces in April 1988, and is widely regarded as having hastened the end of the Iran-Iraq war.