OPEC Production Already Tops New Ceiling

At a meeting in mid-December, members of the Organization of Petroleum Exporting Countries (OPEC) agreed on a new production level of 30 million barrels/day. The 12-member cartel has already exceeded that new limit, producing 31.1 million barrels/day in December.

Petroleum market research firm KBC is cited in The Wall Street Journal estimating that OPEC will produce an average of 30.25 million barrels/day in the first quarter of the year, a slight decrease from the average 30.35 million barrels/day in the fourth quarter of 2011, but nearly 1 million barrels/day less than December’s production.

If KBC is correct, crude prices will rise as OPEC’s production falls because there is really nowhere else for the crude to come from. Saudi Arabia’s spare capacity of about 2 million barrels/day represents most of the world’s total spare capacity.

The arguments against KBC’s estimated production levels include additional production from Libya and the individual members’ own desire to produce and sell more oil when prices are high. Libya produced 900,000 barrels/day in December, according to KBC, nearly double its November production of 480,000 barrels/day. Full production of around 1.2 million barrels/day is possible within the current quarter.

The last official quota adopted by OPEC set production at 24.84 million barrels/day. Every cartel member except Libya, Qatar, and Ecuador is producing above its agreed quota. Iraq is now producing about 2.6 million barrels/day and is not included in the official quota figure. The Saudis have implied that they would be willing to produce more if its customers want more (read that to mean if its customers are willing to pay more).

What really threatens crude prices is the sabre-rattling coming from Iran, which is warning that it may close the Strait of Hormuz if the Europeans and the US carry through with additional sanctions against the country. While Iran could certainly close the Strait, they probably couldn’t keep it closed for more than a few days without risking both a US response and perhaps even some harsh criticism from other cartel members.

Crude oil prices are mixed today, with Brent crude up about 0.25% at $114.00/barrel and WTI crude down -0.25% at $102.96/barrel. Brent is moving up on the Iranian issue and WTI is moving down on continued growth in US inventories.