Will Saudi and Canada Plans Trump OPEC Decision?

OPEC decided not to change its production targets after bickering among its members. Crude prices rose above $100 on the news. There are worries that any sign of increased global consumption tied with the OPEC decision will keep oil prices well above $100 for the foreseeable future.

Demand may not stay high because the global economy appears to have slowed in the last two months. However, inventories are low in some locations. New measurements of US inventories showed that is a real possibility. Occasional disruption of demand may also push prices up. The political stability of much of north Africa and the Middle East is still a concern. Moreover, the hurricane season has begun in the Gulf of Mexico region and the government of large producer Nigeria is unstable.

Saudi Arabia has hinted strongly that it will break with the OPEC decision. It is unclear whether it can increase its production enough to offset the plans of its fellow cartel members and drops in exports from rivals including Libya. The Saudis would have to ramp up production by as much as two million barrels a day. Kuwait, Qatar and the United Arab Emirates may join the Saudis by increasing production.  Even if these nations can improve their rate of exports, it may not be enough. “The amount of OPEC crude that is required for market balance over the next two quarters is so large that, in our view, it may now be too late to fully contain the upside” for prices, Barclays Capital analysts said in a note to investors, the Wall Street Journal reports

The Saudis may seem to be the only factor in production increases. That is not entirely the case. Large producers Canada and Russia have remained silent. The Canadian Association of Petroleum Producers has moved its forecast for oil produced by the country sharply higher, but much of that is expected to come later in the decade. The association’s forecast also put production estimates higher for 2013. Whether the oil firms in the country can accelerate that is unknown. Part of the problem with Canada exports levels is to move crude from the west of the country to pipelines and ships. Pipeline capacity may be too small to allow a short-term effect.

There is some real chance that, over the next year or two, the OPEC decision will not matter much.The Saudis concern that high crude prices could further slow the global expansion will affect its production decisions, and it may not be the only producer which sees similar risks.

Douglas A. McIntyre