Vienna:The Organization of the Petroleum Exporting Countries (Opec) on Wednesday sealed their first new production limit in three years in a deal that settles a six-month-old argument over output levels firmly in Saudi Arabia’s favour.
Opec agreed a supply target of 30 million barrels a day (mbpd), roughly in line with current production. It did not discuss individual national quotas. The agreement caps output for all 12 Opec members for the first half of 2012 but will keep supply running near three-year highs—enough to rebuild lean global inventories.
“We’re not going to bypass it, we’re going to adhere to it,” said Opec secretary general Abdullah al-Badri of the new limit. Higher supply from Opec, mostly from Saudi Arabia and its Gulf allies, has kept a leash on oil prices as Riyadh seeks to help nurture global growth by keeping fuel costs under control.
Saudi Arabian Oil Minister Ali al-Naimi talks to journalist during an OPEC meeting in Vienna, 14 December 2011. Reuters
Brent traded near $108 on Wednesday, down from a year-high $127 in April.
Saudi Arabia was angered when its proposal to lift output in June was rejected and responded by pushing output to its highest in decades, more than compensating for Libyan output lost to civil war.
It said it pumped 10 mbpd last month, in what delegates said was a demonstration of strength to the rest of Opec.
Now Saudi Arabia must decide whether to cut back to make room for rising Libyan output or keep the taps open in a bid to bring oil prices down below $100 a barrel.
“Someone has to cut back to accommodate Libya, that has to be done,” said analyst Lawrence Eagles of JP Morgan. “As always with Opec the proof will be in the pudding. How closely will they stick to the new limit?”
“The main issue for Opec now is to accommodate rising Libyan production. If the Saudis want to protect prices and maintain spare capacity—an issue which worries the market—then they would need to cut back,” said Amrita Sen of Barclays Capital.
“Iran raised no obstacle because they needed a deal and the deal effectively maintains current status quo.”
Price hawks Iran, Venezuela and Algeria, all of whom already pump at full capacity, failed to get a commitment from Saudi Arabia and its fellow Gulf producers Kuwait and the United Arab Emirates (UAE) to make room for the restoration of Libya’s supply.
“If Libya increases, it doesn’t necessarily mean Saudi will cut,” said Saudi oil minister Ali al-Naimi. “We don’t react to that, we react to market demand,” he said.
Libya’s oil minister took the same line. Asked if Saudi Arabia would reduce, he said: “There is plenty of room for everyone, plenty of demand.”
That will concern the price hawks who want to keep oil prices above $100 a barrel.
“We think the present level is appropriate for producers and consumers,” Algerian oil minister Youcef Yousfi said of prices. “Prices are reasonable,” said Iranian oil minister Rostam Qasemi.
The Gulf Arab producers would prefer lower prices to help nurture global economic growth. The UAE said recently that $80-100 was preferable.
“Saudi Arabia is the central banker of the oil market and the decision that they will bring more oil to the market is definitely a good one,” said Fatih Birol, chief economist at consumer body the International Energy Agency.
World oil inventories, boosted by rising Libyan oil output, at 1 mbpd this week from a pre-war 1.6 mbpd, should now rise. Opec’s secretariat calculates that 30 mbpd from Opec will meet demand in the first half of the year and build stocks by 650,000 bpd.
According to the US Energy Information Administration that would lift inventories among industrialized OECD nations from 56 days of OECD demand now to 60 days by the middle of 2012.
Opec next meets on 14 June.
Ramin Mostafavi, Dan Fineren and Alex Lawler contributed to this story.