OPEC meets in Vienna tomorrow for its 163rd ordinary meeting. Almost all commentators, including ourselves, expect a publicly non-contentious meeting with a rollover of the existing 30mmb/d target that has now been in place since December 2011.
In the run-up to the meeting, the Saudi oil minister, Ali al-Naimi, commented that "This is the best environment for the market" by which we believe he means relatively low price volatility with Brent at around USD 100/bbl. We expect that view to prevail, despite grumblings from Iran that USD 100/bbl is too low a price amid concern that the current target production level and current production exceed the call on OPEC crude.
In our view, Iran has a point, in that OPEC itself estimates the call on its crude for 2013 at 29.8mmb/d and puts its own production for April at 30.5mmb/d, based on secondary sources. The equivalent estimates from the IEA are 29.6mmb/d and 30.7mmb/d. Moreover, OPEC production has been increasing since the start of the year which continues to push up inventory levels and looks set to continue doing so if current OPEC production levels are maintained.
We think that OPEC production levels are likely to be maintained, and potentially increase, especially if Saudi production continues to edge up following the cut it instituted toward the end of last year. In our view, that cut was intended to pre-empt the imbalances building in the system but was instead read as a bullish signal in the market and the prime cause of Brent pushing toward the USD 120/bbl level in mid-February.
While Brent has clearly since corrected down toward the USD 100/bbl level, we do not expect Saudi Arabia, or OPEC more generally, to cut production intentionally until it becomes clear that Brent is +/- USD 100/bbl rather than USD 100/bbl +. Given the way oil markets tend to move, it would be our expectation that the ongoing oversupply will likely result in a significant further downward correction at some point, which would then prompt a more pro-active effort from Saudi Arabia to rein in production. However, supply side management is a blunt instrument to manage toward a specific price level, in our experience.
It remains our view that Saudi Arabia will be willing to cut its production to its presurge level in 2011 of around 8.8mmb/d which will probably be enough to recover the price. However, that process is unlikely to start in earnest until price levels are clearly likely to stay below USD 100/bbl on a sustained basis without OPEC action, in our view. Further, we expect that Saudi Arabia will be prepared to make that cut without explicit participation from the rest of OPEC, but it might take a harder stance than that; if it does, the price drop will likely be larger and the pace of recovery slower than if Saudi Arabia proves willing to act unilaterally.