Opec’s failure to reach agreement at its recent meeting to hike oil production to prevent fresh price spikes could jeopardise the group’s unity and weaken its ability to influence crude prices, a prominent oil analyst has said.
The rifts that emerged at the June 8 meeting on whether to maintain output or increase supplies will also give rise to speculation in the market and this could destabilize prices, said Walid Khadduri, a consultant at the Nicosia-based Middle East Economic Survey (MEES) and former information chief at the Kuwaiti-based Organisation of Arab Petroleum Exporting Countries (Oapec).
In an article published this week by the Emirates Centre for Strategic Studies and Research in Abu Dhabi, Khadduri said the UAE, Saudi Arabia and Kuwait favoured an increase of about 1.5 million bpd in the output of the 12-nation Organisation of Petroleum Exporting Countries on the grounds demand in the second half will rise above 30 million bpd according to Opec’s secretariat.
But the proposal was opposed by Algeria, Angola and Ecuador which did not expect demand to grow to that level.
Iran and Venezuela also objected to the increase but it was not clear if their position was politically-motivated, Khadduri said.
Khadduri, an Iraqi, said Opec’s failure to issue a statement at the end of the meeting was a “rare instance in its history.”
“There are concerns that this opposition within the Opec might turn into a political axis that could weaken the policy of consensus which has guided the organization’s work for over a decade. This trend would become clearer in future meetings. If it persists, it could endanger Opec’s unity, strength and future success in the implementation of credible collective policies,” he said.
He said the participation of six new ministers in the meeting caused difficulties in holding successful talks and consultations ahead of, and during, the ministerial meeting, as some former ministers were replaced by new ones just days before the date of the group’s conference.
Additionally, Iran’s periodic presidency of the meeting by a minister who assumed office of the Ministry of Oil just a few days ago—which was clear from his lack of adequate knowledge of the way the organization functions and the importance it accords to reaching unanimous decisions—also contributed to the meeting’s failure in reaching an agreement,” he added.
“The differences exposed by Opec’s June 8 meeting is expected to affect markets for a relatively long period. Speculation in oil market is also expected to increase thus leading to greater price volatility,” Khadduri said.
“The result of differences among Opec members, as well as the likely boost to speculation caused by such differences, is expected to push oil prices higher, which in turn could even exacerbate the volatile political situation in the Middle East. There could be a possible shortfall in production in more than one country in the region, as is the case today with Libyan oil production.”
According to Khadduri, Libya’s oil output before the present unrest was approximately 1.7 million bpd and exports were about 1.3 million bpd. Yemen’s production until mid March stood at around 300,000 bpd.
He said that despite the low volume of its oil production, the importance of Yemen for oil markets lies in its strategic location, as instability in the country is raising fears of wider spread of piracy by Yemeni gangs in the Indian Ocean.
“The threat of piracy emanating from Yemen could add new obstacles to navigation through the Strait of Bab Al Mandeb or lead to rise in the influence of Al Qaeda to neighboring states in the Arab Gulf, in case of a substantial breakdown in the political and security situation of that country,” he said.
“For their part, Saudi Arabia, the UAE and Kuwait have pledged to use their spare capacity to prevent any prospective shortage in supplies. In fact, they have already been making up for the present shortfall in Libyan oil production.”
But Khadduri noted that prolonged support for any interrupted supply would only lower the amount of spare capacity available.
“In other words, the more the spare capacity is exhausted, the greater uncertainty it would engender in oil consumers. Even the raising of questions over strains on supplies could lead to increased speculation in the market…..the impact of these developments on consumers could be telling. Unsettled markets usually cause prices to rise, and this might impact people from developing economies at a time when they are already burdened by high fuel prices.”
He said there is also a danger that high import bills for crude oil and other petroleum products could skew the budgets of several developing countries, which are still struggling to mitigate the effects of the global financial crisis.
“The problem could be compounded by falling oil reserves around the world, which the White House and the International Energy Agency (IEA) have now started warning about publicly,” he said.
“In fact, for the first time data shows that global oil supply seems to be peaking, which could potentially have serious implications for the global economy and for international political stability.”
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