Rollover Anticipated at OPEC Meeting; Quota Discipline in Question as Q2 Demand Retrenchment Eyed

OPEC producers look set to retain the policy course that has served them well in terms of absolute oil price levels in the last year, as they gather to meet at their new headquarters in Vienna (Austria), in the 50th year since the group's formation.

A number of supportive comments on current policy have been put forward by key members in recent weeks, with no major shifts in global markets or pricing to argue for an upward revision, even if group discipline does seem to be eroding. February 2010 production for the OPEC-11 is estimated to be the highest in 14 months at 26.7 million b/d, according to International Energy Agency (IEA) figures, and 26.8 million b/d on OPEC secondary source data. Quota compliance for that month is variously estimated at 53–56% of volume cuts—although data released from the OPEC-11 to the Joint Oil Data Initiative (JODI) suggest that external estimates have consistently overstated the degree of member restraint through the last year. The table below shows the JODI data for the full-year 2009, according to submissions to the transparency initiative put forward by member states' oil ministries. While average compliance rates for Libya, Qatar, and the United Arab Emirates exceed 97% (the United Arab Emirates lacks November/December data and Qatar, December, where we have averaged for 10–11 months), the 2009 average across the group is just over 51%, relative to the quota cut of 4.2 million b/d applied in January 2009. That figure includes Venezuela, where JODI figures are marked "use with caution" due to their divergence from secondary source data; compliance levels average a more respectable 63% for the year if Venezuela is removed from the equation, although still below external views on the producer group's discipline.

Looking at the monthly record of compliance, the 2009 year follows the patterns established by external estimates, with the peak of OPEC-11 compliance reached in April 2009 at 63%, set against external estimates of compliance upwards of 80% by that stage (again with the Venezuela caveat, without which compliance stands at over 80%). Perhaps more notably, Saudi Arabia reported crude production at levels of 8.36 million b/d in March and June 2009, against a quota ceiling of 8 million b/d, despite market views that the country was bearing the brunt of the compliance effort in those early months. While JODI is just another data source, the historical nature of the information released argues for greater transparency from participating members—as too, in the case of Saudi Arabia, strong political support for the initiative, which is hosted by the International Energy Forum Secretariat in the Saudi capital, Riyadh.

In any event, the implied over-production makes the task ahead more difficult with expectations of a significant fallback in demand through the shoulder months of the second quarter, when northern-hemisphere winter demand drops off and before U.S. driving season and higher summer demand kicks in.

Outlook and Implications

By most measures, OPEC production is still rising month on month, raising concerns of over-production as the second-quarter shoulder months approach. In IEA March figures, a 300,000-b/d fallback in the "call on OPEC and stock change" is seen to 28.9 million b/d (from current OPEC-12 production of 29.2 million b/d), while OPEC's latest report sees a 1.5-million-b/d production overhang on second-quarter demand at current output levels, based on a more bearish view on second-quarter demand at 27.83 million b/d.