OPEC shifts its oil trade map over rising U.S. shale supplies

A horse and carriage passes the OPEC building in Vienna May 29, 2013. The 163rd (Ordinary) Meeting of the Conference of the Organization of the Petroleum Exporting Countries (OPEC) takes place in Vienna on May 31. (REUTERS/Leonhard Foeger)

VIENNA: OPEC exporters, who are set to leave production policy unchanged, were weighing Thursday the impact of rising supplies of U.S. shale oil that are redrawing the landscape of global oil trade.

The Organization of Petroleum Exporting Countries has little room to pump more crude due to the U.S. oil boom that has sparked competition for market share in Asia and set off a rivalry between its top two producers Saudi Arabia and Iraq.

At a meeting in Vienna Friday, the 12-member group is expected to stick to its 30 million barrel a day output target for the last six months of 2013.

A year ago, OPEC gave shale oil short shrift, but now it is a hot topic. Gulf producers are of the view that OPEC will still be able to pump at least 30 million bpd, provided U.S. shale grows at a moderate pace.

“Shale oil is not a threat, but it changes the dynamics of where the oil is going. There will be more competition in Asia,” said a Gulf OPEC source.

Despite the growing supply, oil is comfortably above $100 a barrel, well below the $125 that rang alarms in major consumer countries last year.

But triple digit oil has also unlocked vast amounts of U.S. shale oil in North Dakota and Texas which competes with OPEC crude of similar, light quality from Nigeria and Algeria, rather than the heavier Saudi output.

Nigeria and Algeria have already felt the heat from the U.S. oil boom, losing ground in their most lucrative export market and diverting sales to Asia.

Fast-growing exporter Iraq is also fighting for a greater Asian market share, competing with regional rival Saudi Arabia.

“We are looking to increase our exports and we aim to make our crude more competitive in the market,” Iraq’s Oil Minister Abdel-Kareem Luaibi told reporters in Vienna.

The United Arab Emirates, also building up capacity, has the region in its sights, but downplayed the prospect for battle. “I’m not of the view that competition in Asia is going to distort the price,” UAE Oil Minister Suhail bin Mohammad al-Mazroui told Reuters.

Innovative use of hydraulic fracturing, or “fracking,” has put the United States in line to become the world’s largest oil producer by 2017, overtaking Saudi Arabia.

That is not worrisome for Riyadh, especially when it comes to charting policy for the second half of 2013.

And the kingdom – holder of most spare capacity in OPEC – shows no sign of opening the taps to bring down prices and curtail that output by making it uneconomic.

By the end of last year, the United States had recorded the biggest annual rise in oil output since it first pumped oil in the early 1860s. The 850,000 bpd increment was more than each of OPEC’s two smallest producers, Qatar and Ecuador, pump in total.

Surging non-OPEC production has not prompted so much debate in the cartel in more than a decade, but there is no common view. While Naimi welcomes it, his Nigerian counterpart Diezani Alison-Madueke has said it will have a “major impact.”

Some within OPEC are concerned about the potential for both slow global growth and a dramatic rise in U.S. shale oil to send prices tumbling.

But the group that pumps a third of the world’s oil is not known for contingency plans.

OPEC delegates now say this meeting will not be electing a new secretary-general – stuck in a logjam of competing candidates from Iran, Iraq and Saudi Arabia – but will merely approve the criteria for prospective candidates to come forward.

With change in the output ceiling unlikely, short-term market management will be guided by OPEC’s leading producer Saudi Arabia – the only member with significant unused capacity – supported by the UAE and Kuwait.

Saudi Arabia has cut back from a 30-year high reached in 2012 of 10 million bpd, pumping 9.30 million bpd in April.

That has helped bring overall OPEC production down to 30.46 million bpd, 460,000 bpd above the target.

Iran’s crude exports fell back in May to around 1.00 million bpd from 1.1 million bpd in April, according to a Reuters survey Thursday, reflecting the impact of U.S. and European sanctions on sales.

While challenges loom in the medium term, the numbers for the rest of 2013 suggest OPEC will have some breathing space.

Demand for OPEC crude is set to rise in the second half to average 30.47 million bpd, up from 29.14 million bpd in the current quarter, according to OPEC forecasts. So if OPEC holds output at April’s rate, supply would match the average requirement in the second half of 2013.

Price hawks Iran, Algeria and Venezuela may still call for supply cuts.

Yet Venezuela, at least, looks set to keep the status quo.

Oil Minister Rafael Ramirez has said he will propose that OPEC keep oil production quotas unchanged.

A version of this article appeared in the print edition of The Daily Star on May 31, 2013, on page 5.




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