Organization of Petroleum Exporting Countries (OPEC) members Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela produce about 40 percent of the world's oil and hold more than 77 percent of the world's proven oil reserves. OPEC also contains most of the world's excess oil production capacity.
Recent developments:
At OPEC's January 17 meeting in Vienna, OPEC 10 (OPEC excluding Iraq, which is not affected by quota changes) member countries agreed to cut production quotas by a total of 1.5 million barrels per day (bbl/d) to 25.2 million bbl/d.
OPEC's early decision to cut - when the OPEC basket price was trading within its preferred $22 - $28 range during January - was a signal to markets that it is serious about defending the prices that members received for their crude oils.
The early cuts were made in anticipation of the cyclical decline in world oil demand that follows the end of the winter heating season, and to avoid the supply/demand imbalance that had led to the decline in the OPEC basket price from over $30 per barrel at end-November to the $21 - $22 range at end-December.
OPEC's quota effective February 1 will be 200,000 bbl/d below its July 1, 2000 quota. Although the quota cuts are pro rata, applying proportionally to all members, all countries are not expected to implement proportional production cuts.
Several countries - Indonesia, Iran, and to a lesser extent Nigeria and Venezuela - were producing below their previous quota levels at the beginning of 2001, and Indonesia's production was below its new February 1 quota level.
However, countries such as Saudi Arabia produced above quota levels during this time, and the last time quotas were this low (in July 2000) the OPEC 10 countries produced almost 400,000 bbl/d above quota.
EIA assumes that some OPEC countries will continue to produce above quota levels, and that actual OPEC 10 production will decline by about 1 million bbl/d from end-2000 levels, with half of this decline coming from Saudi Arabia (however, the OPEC 10 production differential between fourth quarter 2000 and first quarter 2001 is only 619,000 bbl/d - see the table below).
This assessment is essentially unchanged from the previous Outlook. Some OPEC members have suggested that further cuts will be needed to maintain world oil supplies in balance with demand, and that additional quota cuts would be discussed at its March meetings. EIA's assessment does not factor in any further cuts in 2001.
Iraq:
Iraqi exports have fluctuated considerably over the past two years, with drops occurring every six months in conjunction with the expiration of each phase of the U.N.'s oil-for-food export plan for Iraq.
Cutbacks also have occurred because of Iraq's attempts to loosen U.N. sanctions and to change the terms of Iraqi payments for war reparations to Kuwait.
In September, world oil markets showed concern that Iraq might limit exports because of the U.N.'s decision to grant the Kuwait Petroleum Company a large compensation claim against Iraq.
At the end of October, concerns mounted that Iraq would suspend exports if it weren't allowed to receive payments in euros instead of dollars.
At the beginning of December, Iraq's attempt to alter the payment terms for its exports by demanding a $0.50 per barrel surcharge for its oil resulted in additional concerns. Iraq continued to demand a surcharge for its oil -this time $0.40 per barrel - in January.
As a result of its efforts to further erode U.N. sanctions, Iraqi exports were reduced in December and in January, and included a three-week halt in loadings at the Ceyhan terminal on the Iraq-Turkey pipeline.
These efforts are assumed to continue in 2001 with negative consequences on Iraqi exports and production.
EIA assumes that Iraq will not be able to meet its goal of producing 3.4 million bbl/d in 2001 - the level at which Iraq produced in July 1990, prior to the Gulf War - and EIA has lowered its assessment of Iraqi production for the year.
World oil markets:
As a result of the revised assumptions for Iraqi production, EIA has lowered its projected OPEC production levels for 2001 - 2002 by 300,000 bbl/d from the previous Outlook.
Even with this reduction and the OPEC 10 quota cuts, surplus oil production capacity worldwide is currently near its lowest level during a non-disruption period over the past three decades.
Surplus production capacity in the OPEC countries will be as low as 3.3 million bbl/d (3.8 million bbl/d worldwide) in first quarter 2001.
Only Saudi Arabia and to a lesser extent the United Arab Emirates have significant capacity to further expand production.
Unless there is a world economic slowdown to dampen world oil demand, oil consumption will grow more than twice as fast as non-OPEC production in 2001 and 2002.
If this is the case, the expected OPEC production cuts in early 2001 will be sufficient, and no further cuts would be needed to maintain prices within OPEC's target range.
However, differing views on the expected world oil supply/demand balance could lead OPEC to make additional cuts this year.
"Missing barrels":
Estimates of world oil inventories indicate that world oil supply/demand balances do not fully reflect the state of the world oil market. Despite the large increases in production and relatively smaller increases in consumption that are believed to have occurred, world oil stocks have not increased.
This implies that production has been overestimated, consumption data has been underestimated, or that the stock data are incorrect. This situation has become known as the "missing barrels" problem.
The most reliable stock data are for the industrialized countries in the OECD. OECD stocks, which are believed to account for roughly half of total world oil stocks, remained virtually unchanged in 2000 despite four increases in OPEC production quotas during the year.
EIA's supply/demand balances suggest that OECD stocks should have increased by almost 400,000 bbl/d during the year.
Since the stock data do not show this increase, these barrels have been characterized as "missing", with a further unknown amount not showing up in non-OECD stocks.
The "missing barrels" - if they exist - are significant because they totaled almost 150 million barrels in 2000 - large enough to move OECD stocks from historically low levels to the middle of their range for the past 7 years.
Similar amounts of "missing barrels" in 2001 would be large enough to bring OECD stocks to the upper end of their range for the past 7 years.
The relationship between stock levels and price shows why it is important to accurately assess world oil supply/demand balances.
The yellow band on the graph above shows the range within which OECD stocks varied in the post-Gulf War period from 1993-1999. During most of 1998, OECD stocks were at their highest levels in seven years, while crude oil prices in that year were at the lows for this period.
Conversely, OECD stocks in 2000 were on average lower than at any other time during the post-Gulf War period, resulting in the highest world oil prices during the post-Gulf War period.
The "missing barrels" problem further complicates OPEC's task of assessing world oil market conditions and making the necessary adjustments to OPEC quotas to maintain oil prices within its target range.
OPEC Crude Oil Production1 (Thousand barrels per day)
4Q 2000 Production 1Q 2001 Production 2/01/01 Quota3 1Q 2001 Surplus Capacity4
Algeria 838 827 805 73
Indonesia 1,270 1,260 1,307 90
Iran 3,798 3,744 3,698 56
Kuwait5 2,212 2,151 2,021 49
Libya 1,440 1,430 1,350 20
Nigeria 2,133 2,124 2,075 176
Qatar 727 710 653 40
Saudi Arabia5 8,833 8,498 8,189 1,502 - 2,0026
UAE7 2,332 2,271 2,201 329
Venezuela 3,007 2,954 2,902 96
OPEC 10 Crude Oil Total 26,589 25,970 25,200 2,430 - 2,9306
Iraq8 2,332 2,221 N/A 879
OPEC Crude Oil Total 28,921 28,191 3,309 - 3,8096
Other Liquids9 2,641 2,691
Total OPEC Production 31,562 30,882
NA: Not Applicable
1.Crude oil does not include lease condensate or natural gas liquids.
2.Quotas are based on crude oil production only.
3.OPEC's new quotas as of October 31 were put in effect after the OPEC basket remained above OPEC's target range or price band for 20 consecutive trading days after the previous OPEC quotas took effect on October 1. The informal rule prompting the quota increase is referred to as OPEC's price band mechanism.
4.Maximum sustainable production capacity, defined as the maximum amount of production that: 1) could be brought online within a period of 30 days; and 2) sustained for at least 90 days. Saudi Arabia is the only country with the capability to further increase its capacity significantly within 90 days. As a result, the estimates for Saudi Arabia as shown as a range, with the lower figure using the 30 day` definition and the upper end reflecting Saudi Arabia's 90 day capability.
5.Kuwaiti and Saudi Arabian figures each include half of the production from the Neutral Zone between the two countries. Saudi Arabian production also includes oil produced from its offshore Abu Safa field on behalf of Bahrain.
6.Saudi Arabia can increase its sustainable production capacity to 10 million barrels per day within 30 days and to 10.5 million barrels per day within 90 days. The lower end of the excess capacity range reflects the maximum amount of production that could be brought online within a period of 30 days, while the upper end reflects Saudi Arabia's 90 day capability.
7.The UAE is a federation of seven emirates. The quota applies only to the emirate of Abu Dhabi, which controls the vast majority of the UAE's economic and resource wealth.
8.Iraqi oil production is constrained by the United Nations and as such has not been a part of any recent OPEC agreements. United Nations' Resolution 986 (April 1995) limits the sale of Iraqi crude oil over six-month periods to specified dollar amounts.
9.Other liquids include lease condensate, natural gas liquids, and other liquids including volume gains from refinery processing.
Meetings, Announcements, and Related events:
At its quarterly meetings, the OPEC 10 countries decide issues and make announcements that influence world oil markets and prices. Major recent decisions and announcements include:
March 16, 2001: OPEC's scheduled meeting to review the state of world oil markets.
January 17, 2001: OPEC agreed to cut production quotas by 1.5 million bbl/d, effective February 1, 2001.
December 21, 2000: The average OPEC crude oil price - the basket price - fell below $22 per barrel for the first time since April 11, ending a period of 180 trading days during which it had remained above this level. The basket price remained below this level for the rest of the year, before rising above $22 per barrel on January 2, 2001.
December 5, 2000: The eighth phase of the U.N.'s oil-for-food export plan for Iraq concluded.
December 5, 2000: The average price for OPEC oil - the basket price - fell below $28 per barrel for the first time since August 11, concluding a period of 81 trading days above $28 per barrel.
November 17-19, 2000: OPEC and consuming nations (including the U.S.) met in Riyadh, Saudi Arabia, to discuss world oil markets.
November 13, 2000: OPEC reached an agreement in principle to wait until its next meeting on January 17 to act again on production, and to use its informal price band mechanism to boost low prices instead of cutting high prices.
As a result, the price band mechanism was not activated at end-November to further increase OPEC production quotas.
October 31, 2000: OPEC's informal price band mechanism took effect as OPEC members agreed to increase production by 500,000 barrels beginning Tuesday, October 31. Also, the price band mechanism began a new count for being triggered again.
Opec pricing:OPEC collects pricing data on a "basket" of seven crude oils (Algeria's Saharan Blend, Indonesia's Minas, Nigeria's Bonny Light, Saudi Arabia's Arab Light, Dubai's Fateh (or Dubai), Venezuela's Tia Juana Light, and Mexico's Isthmus (a non-OPEC crude oil) to monitor world oil market conditions.
Other major world crude oils important for oil pricing, called "benchmark" crudes, include U.S. West Texas Intermediate (WTI) and North Sea Brent crude.
WTI is traded on the New York Mercantile Exchange, and Brent is traded on the International Petroleum Exchange in London, and both crude oils also are traded on spot markets.
Because WTI is a very light, sweet (low sulfur content) crude, it is more expensive than the average OPEC basket, which is an average of light sweet crude oils such as Algeria's Saharan Blend and heavier sour (high sulfur content) crudes such as Dubai's Fateh.
Brent is also lighter, sweeter, and more expensive than the OPEC basket, although less so than WTI.
The price gap between the OPEC basket and other "benchmark" crudes has increased in recent months. As world oil markets became very tight in the second half of 2000, OPEC responded by increasing production, and most of the increased production added heavier, more sour crude oil to the market.
However, demand was especially high for light, sweet crudes, and the additional heavier, more sour oil had to be heavily discounted relative to the WTI and Brent crudes. Therefore, the difference in price between WTI, Brent, and the OPEC basket widened in recent months.
OPEC production cuts are likely to remove more heavy, sour crude than light, sweet crude from world markets, potentially decreasing the price difference in the coming months.
The average price for imported oil paid by U.S. refiners is referred to as the Imported Refiners' Acquisition Cost (IRAC). This average cost for imported oil is used as a proxy for the average world oil price, and is the world oil price used in EIA's Short-Term Energy Outlook.
The IRAC price and OPEC basket price have tracked closely during the past few years, but the difference widened in January 2001.
In January 2001, OPEC suggested that it might change the composition of its basket to include heavier, more sour crudes, and replace crude oil such as Venezuela's Tia Juana Heavy with its Tia Juana Light.
If the group decides to go ahead with this Venezuelan-backed change, the cost differential between the basket and the other benchmark crudes is likely to grow. A technical committee is currently reviewing the plan.
In addition, Saudi Arabia has decided to alter the pricing formula for its Arab Light crude oil, one of the key components of the OPEC Basket. In particular, Saudi Aramco has changed its method of determining prices for long term contract sales to Europe.
Instead of relying on Brent spot market prices ("dated Brent") to determine the price for its oil to European customers, it will instead use a "B-Wave" in the second half of 2000.
The "B-Wave" uses a weighted average of Brent futures prices, which is less volatile than the spot market price. The new method has resulted in both a slightly higher cost per barrel for Arab Light and a more consistent price for European customers.
Iran also changed to the "B-Wave" in early 2001. Saudi Aramco reportedly is not considering changing its pricing method for sales to Asia or the U.S.
The price band mechanism:
During its March 2000 meetings, OPEC adopted an informal price band mechanism whereby prices higher than $28 per barrel or lower than $22 per barrel for the OPEC Basket would trigger automatic production adjustments.
Prices sustained above the target range for 20 trading days were to result in an automatic production increase of 500,000 bbl/d. Prices below the target range for 10 trading days were to result in cuts of 500,000 bbl/d.
The price band did not go into effect immediately, in part because of members' disagreement regarding the band's trigger points.
Some OPEC members believed that the trigger was a moving average for the OPEC basket price, while others wanted the OPEC basket daily price to remain outside the band in order for supply changes to be enacted.
At its June 21, 2000 meeting, OPEC clarified the terms of the price band mechanism to mean that supply changes would be forthcoming if the daily basket price were above $28 per barrel for 20 consecutive trading days, or below $22 per barrel for 10 consecutive trading days.
In addition, OPEC specified that supply adjustments would not be automatic, but would be informal and require the approval of an OPEC conference.
Although the average OPEC basket price stayed above the $28 level between August 14 and December 4, 2000, the informal price band mechanism was activated only once. On October 31, OPEC activated the mechanism to increase aggregate OPEC production quotas by 500,000 barrels per day.
The price band was formally ratified at OPEC's January 17, 2001 meeting. OPEC Secretary General Ali Rodriguez of Venezuela confirmed the group's commitment to the $22-$28 price band, but added that the group still could adjust production at any time.
Rodriguez stated confidence that the group had achieved "complete consensus" regarding the band. Furthermore, he maintained that producing and consuming nations had agreed that a $25-per-barrel price would translate to a stable world oil market and benefit both exporters and importers.
OPEC's current proposal to change the composition of the basket to reflect the heavier and more sour crudes that comprise the majority of many members' exports could alter the effect of the price band as well.
If the quality of crudes in the basket decreases while the target price for the basket remains the same, OPEC will essentially be defending a higher price for its oil. There is concern that, if this plan comes to fruition, it could push prices of other benchmark crudes upward.
Source: United States Energy Information Administration.
© 2001 Mena Report (www.menareport.com)
