TradingMarkets.com (LA): OPEC To Maintain Oil Output Amid Geopolitical Instability

Wednesday, March 08, 2006; Posted: 11:04 AM
(RTTNews) – Amid uncertainties regarding the International Atomic Energy Agency's ongoing meeting to decide the faith of Iran's nuclear program, the Nigerian militant crisis and disturbances in the Middle East, the decision by the OPEC on Wednesday, to leave the current output ceiling unchanged came as a breather. The next meeting of the oil cartel is scheduled to be held in Caracas, Venezuela, on June 1.
The OPEC President, Edmund Daukoru, the Nigerian oil minister, confirmed that the cartel would not change its production level in the midst of the political volatility and terrorism upsetting global markets. It was highly expected that the group would retain the output levels at 28 million barrels per day ceiling, amid forecasts of lower demand in spring. This official target, however, excludes Iraq, which produces an additional 1.5 million barrels per day.
The much-hyped meeting of the Organization of the Petroleum Exporting Countries was kicked off in Vienna. OPEC, which controls, more than half of the world's oil exports was left with little choice with the prices hovering near $62 a barrel, interruptions in exports from Nigeria and Iraq and the Iran nuclear debate.
Geopolitical Factors
Nigerian Crisis
Oil facilities in Nigeria, which ranks eleventh in oil production, have been hit by violent attacks by armed separatist militants, who seek control over the Niger delta's oil revenues. Armed militants have vowed to slash daily oil export by another 1 million barrels by March-end. However, Edmund Daukoru, OPEC's president and Nigeria's oil minister, said that the country was “committed to providing adequate security for operators in the Niger Delta,” and that it planned to pump an additional 600,000 barrels a day by June.
Kidnappings of the employees of the oil companies have been rampant, forcing the companies to shut down their facilities in the region. Earlier in the week, one of the major pipelines of the oil giant Royal Dutch Shell, was severely damaged in a series of militant attacks. Shell had already shutdown its output from the region over security concerns.
In February, the suspension of crude loading at the Forcados terminal as well as evacuation of the EA field by Shell, resulted in a drastic reduction of about 20% in Nigeria's 2.6 million barrel per day output as well as fuelling a rise in world oil prices.
Beginning 2006, the country has suffered a loss of more than 10.5 million barrels of oil output due to rebel violence. Iran Nuclear Conundrum
Wednesday, the IAEA, UN's nuclear watchdog, passed the Iran nuclear issue to the Security Council to consider possible political or economic sanctions against the Islamic republic, which refuses to give up nuclear research. While Iran insists it only wants to produce fuel for nuclear reactors to generate electricity, the U.S. and an increasing number of nations doubt that the true goal of Tehran is to create the fissile material for warheads.
Iran, the second-biggest producer of crude in OPEC, might slash its oil exports if it comes under UN sanctions over its nuclear program. Iranian nuclear negotiator, Ali Larijani on Sunday, issued a veiled warning, indicating that the Iran could use oil as a weapon on escalation of the nuclear crisis, but hinted that it would not initiate bringing oil into the dispute. Iran did not back down from oil supplies, even during the 1980-88 Iran-Iraq war. Larijani is quoted as saying that Iran had no interest in using oil prices as a weapon against the West but warned that if action were taken against Tehran, it would affect international oil prices anyway.
The U. S. has cautioned Iran, the world's fourth largest oil exporter, to watch out for consequences from the United Nations, if it failed to stop nuclear research. Iran retaliated saying it had the potential of inflicting “harm and pain” and could change its oil policy.
The European Union announced that Iran must stop uranium enrichment work and cooperate fully with United Nations inspectors if it were to avoid scrutiny from the UN Security Council. The EU representative urged Iran to reinstate a full suspension of all uranium enrichment-related and reprocessing activities.
Iraq, Middle East Concerns
Iraq's oil industry is hit with lot of technical disruptions in terms of lack of field maintenance, power cuts, insufficient storage and problems with tugs cut shipments out of Iraq's main southern terminal of Basra, worsening security problems. Oil exports climbed to 1.42 million barrels per day in February from 1.1 million barrels per day in January. During Saddam Hussein regime, the nation shipped around 1.7 million barrels per day.
Elsewhere in the Middle East, on February 24, the world's largest oil-processing complex in Saudi Arabia was bombed.
Outlook
OPEC, the 11-nation cartel, projects a global slowdown for oil demand in the second quarter. The hard-to-refine high sulfur crude of Iran is facing less demand. In contrast, the oil prices are at an all-time high for the quarter of a century in real terms.
The major exporter and the most powerful in OPEC, Saudi Arabia has left the output flat since May 2004 considering customer needs and the country is of the opinion that any slash in production now would be counter-productive. Meanwhile, another member, Venezuela is seeking a production cut of nearly 500,000 barrels a day.
Anxiety is surrounding the peak winter season, when some analysts fear OPEC would find it difficult to meet demand if output constraints continue. However, non-OPEC producers like Russia and Angola are expected to fill the gap.
The United States, consumer of nearly a quarter of the world's oil and the oil thirsty China are driving the demand, which almost doubled the prices in the past two years. Analysts fear if the prices tend to move uphill by $10 a barrel in next two years, inflation would move up 0.25% a year and hurting growth similarly.
Meanwhile, the U.S. Department of Energy is scheduled to release the weekly petroleum report. Analysts expect a rise in U.S. crude stocks, while a decline is anticipated in gasoline and distillates, consisting of heating oil and diesel.
In a statement on Wednesday, Britain's Prime Minister Tony Blair said, Britain faces a “major challenge” in meeting its energy needs and climate change obligations without considering nuclear power “in the mix”.
Oil Prices
On Wednesday, oil prices slid on expectations that OPEC would retain the current output levels and the data from the U.S. to indicate growth in crude inventories. Light, sweet crude for April delivery shed 31 cents to $61.27 a barrel in electronic trading on the New York Mercantile Exchange, while April Brent crude futures on London's ICE Futures exchange lost 50 cents to $60.67 a barrel. Gasoline slipped more than a cent to $1.6200 a gallon, while heating oil shed a cent and a half to $1.7061 a gallon. Natural gas gained 2 cents to $6.700 per 1,000 cubic feet.