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Naimi’s good times will last as lost output lifts prices

Saudi Arabia's Minister of Petroleum and Mineral Resources Ali Ibrahim Naimi gestures as he speaks to journalists prior to the start of a meeting of the Organization of the Petroleum Exporting Countries, OPEC, at their headquarters in Vienna, Austria, Wednesday, June 11, 2014. (AP Photo/Ronald Zak)

Twelve of the world’s most powerful petroleum ministers gathered around a horseshoe of tables in Vienna this week to pass judgment on the oil market. One of them sounded happier than the rest.

“This is the best time for the market,” Ali al-Naimi, Saudi Arabia’s minister, told journalists before the meeting of the Organization of Petroleum Exporting Countries Wednesday. A day later, U.S. and European crude prices, which have exceeded $100 a barrel for a record time, surged to multimonth highs, spurred by worsening conflict in Iraq, the group’s second-biggest producer. Libya, with 48 billion barrels of reserves, is pumping 10 percent of what it can because of unrest.

Saudi Arabia is showing satisfaction with oil prices at a time when OPEC’s collective influence seems diminished. Years ago, its utterances mattered to the market and the global economy. The group whose member countries supply 40 percent of the world’s oil barely moved prices as they met for just three hours and repeated what they said the last four times: Let’s keep pumping 30 million barrels per day.

“The good times are going to last for Saudi Arabia for as long as the outages continue,” said Jamie Webster, an analyst at IHS Energy in Washington. “Even if some of that lost production comes back, the Saudis are still in good shape. They could reduce production by a million barrels a day without panicking.”

Brent crude gained 0.4 percent to $109.95 a barrel on the day of the meeting, at the top of the end of what Naimi described as a good range. Prices rose to as high as $114.69 Friday, the most since September, before falling to $113.43 at 1:32 p.m. on the ICE Futures Europe exchange in London as fighting in Iraq intensified. West Texas Intermediate climbed to the highest in eight months.

OPEC’s output decisions are unlikely to regain some potency until at least next year because disruption in Iraq and Libya mean that Saudi Arabia alone has the capacity to increase production. The kingdom is still sitting on about 2.5 million bpd of unused output capacity and committed to adjusting supply as demand dictates.

Demand for OPEC crude is declining as rising production from outside the group, mostly shale oil in North America, more than covers growth in global consumption. The world needed 30.3 million bpd from OPEC last year, falling to 29.2 million in 2008, before rising again the following decade, the group’s own estimates show.

Yet Saudi Arabia, the world’s largest oil exporter, has raised crude output to an average of 9.7 million bpd this year, 4.8 percent above the same period in 2013, according to data the kingdom has supplied to OPEC. It may need to lift production to a record 11 million bpd to satisfy demand in the second half, said Energy Aspects Ltd., a London-based consultant.

Naimi has been able to enjoy steady prices and rising production largely because of the misfortune of other OPEC members.

“Although there’s a sense of balance in the oil market, the convergence of OPEC output to this target has so far been largely due to unplanned outages, rather than a concerted effort by member countries to restrict output at those levels,” Miswin Mahesh, an analyst at Barclays Plc in London, said by email.

Iraq’s production contracted 6.4 percent since reaching a 35-year peak of 3.6 million bpd in February amid political disputes and pipeline bombings, according to the International Energy Agency. An Al-Qaeda offshoot has captured the nation’s second-biggest city, Mosul.

In Libya, output has fallen to about a 10th of capacity because of political protests at oil fields and terminals. Iran next month may face an end to relief from international sanctions, which have reduced oil exports, if it can’t reach a broader deal on its nuclear program.

These disruptions mean OPEC won’t face tricky discussions over changing its collective production target, or imposing individual quotas to avoid pumping too much oil, until at least next year, according to analysts from Energy Aspects, Petromatrix GmbH and VTB Capital.

“Things are very happy for those OPEC members who are able to produce more while prices are high and stable,” Webster at IHS said. “The only way things get bad is if a large chunk of production comes back while at the same time U.S. output continues to grow apace, requiring OPEC to reduce output.”

 
A version of this article appeared in the print edition of The Daily Star on June 14, 2014, on page 4.

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Summary

Twelve of the world's most powerful petroleum ministers gathered around a horseshoe of tables in Vienna this week to pass judgment on the oil market.

Libya, with 48 billion barrels of reserves, is pumping 10 percent of what it can because of unrest.

Saudi Arabia is showing satisfaction with oil prices at a time when OPEC's collective influence seems diminished.

Brent crude gained 0.4 percent to $109.95 a barrel on the day of the meeting, at the top of the end of what Naimi described as a good range.

Saudi Arabia, the world's largest oil exporter, has raised crude output to an average of 9.7 million bpd this year, 4.8 percent above the same period in 2013, according to data the kingdom has supplied to OPEC.

Naimi has been able to enjoy steady prices and rising production largely because of the misfortune of other OPEC members.


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