In what turned out to be a very short meeting, OPEC rolled over its current 30mmb/d target, as we expected, even though it noted that “the second half of the year could see a further easing in fundamentals, despite seasonally higher demand.” OPEC also set its next meeting for 4 December, which is expected to be an Ordinary Meeting.
OPEC noted that “Member Countries, would if required, take steps to ensure market balance and reasonable price levels for producers and consumers, and Member Countries reiterated their readiness to rapidly respond to developments that might place oil market stability in jeopardy.”
We strongly suspect that members will have to respond to lower prices and that the next meeting might well be an Extraordinary one, held much earlier than December. That is because OPEC is currently producing well above its 30mmb/d target and production has been rising steadily since the low point in January. Early indications for May are that production increased 0.1mmb/d MoM to just over 31mmb/d, according to Bloomberg estimates. That included a further 170kb/d increase in production from Saudi Arabia, most likely in response to rising crude burning for power generation as the summer approaches and possibly as part of the commissioning process for the new 400kb/d SATORP refinery, we expect.
Although the increase in Saudi production is most likely to meet its own needs, nevertheless that increase in domestic demand is reflected in aggregate global forward demand forecasts which already had OPEC crude output running some 0.7mmb/d ahead of demand. While that is significantly less than the estimated overproduction in 2Q13 of 1.8mmb/d, nevertheless it is significantly in excess of demand and will become more so if OPEC production continues to rise for whatever combination of reasons (as is currently happening). Unless Saudi Arabia cuts production, we would expect aggregate OPEC crude production to continue to rise as net capacity increases elsewhere, most notably from Iraq.
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.