Hopes for OPEC cuts to buoy oil price are premature: Campbell

NEW YORK Mon Apr 22, 2013 10:50am EDT

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NEW YORK (Reuters) - It does not take much of a wobble in the oil price to get traders starting to bet on action by OPEC, or at least Saudi Arabia, to cut output to put a floor under the market. But this time these hopes are coming far too soon for any prospect of real action.

For one thing, Brent crude prices are hardly that weak. While the North Sea benchmark has dropped more than $10 a barrel from its high earlier this year, it is only now in line with the $100 a barrel target embraced by most members of the Organization of the Petroleum Exporting Countries.

The recent price decline comes as the U.S. dollar has been on the rise. The greenback is up nearly 4 percent against a basket of other currencies meaning OPEC members get more bang for the petro-bucks, undercutting one of the favorite arguments among OPEC price hawks for a higher oil prices.

And with the anticipated rise in oil demand in the third quarter, some of the slack currently in the market may well be mopped up by seasonally stronger consumption. So taking a decision now would almost certainly be premature.

Equally premature, it would seem, is the suggestion floated last week by Venezuelan Oil Minister Rafael Ramirez that OPEC members are talking about holding an extraordinary meeting.

While consultations between OPEC members likely picked up in recent weeks, there is no sign a meeting will be held before the next scheduled gathering in Vienna on May 31.

If someone was to bully Saudi Arabia into holding an emergency meeting, it would not be Venezuela. Caracas is marginalized within OPEC due to its slumping oil production capacity and limited diplomatic clout with the main Gulf Arab oil producers. With no other members calling for early talks, there is little likelihood of a formal meeting coming early.

Thus Ramirez's talk should be seen more as an expression of the hope of Venezuela, one of the most cash-strapped members of the exporters' club, than any sign of a policy shift.

SEASONALITY KEY

By the end of May, the main players in OPEC will have a much better idea about the state of global oil demand heading into the third quarter.

Key questions will have become clearer. Is China's diesel export spree due to seasonal or fundamental factors? What is the scope of North Sea oil field maintenance? Are major non-OPEC supply expansions, such as Kazakhstan's troubled Kashagan field, on track to start or are they, as is strongly rumored in the case of Kashagan, delayed again?

But even then, it is doubtful that OPEC will take any decisive action unless oil prices are weak when the group meets. A restatement of the group's current ceiling and a vow to keep markets supplied as necessary to meet demand are the most likely outcome.

Deeper action on production would require a revival of the defunct quota system, something that cannot really be done without a major overhaul that recognizes the changes in production capacity within the group, such as the rise of Iraq and the decline of Iran and Venezuela.

Barring a serious crisis, OPEC, which cannot bring itself to agree on who should fill the largely ceremonial role of Secretary-General, will eschew the tough confrontation that would be needed to restore the quota system.

Oil at $100 a barrel is not a serious crisis for almost everyone in OPEC. And it is far from clear that oil at $90 a barrel would be a crisis either, at least for the key players within the group.

One of the least productive exercises in oil analysis is trying to figure out a short term floor for oil prices depending on the budgetary requirements of OPEC member states.

Government spending tends to rise, not only in OPEC nations, but worldwide, to match revenues. Moreover, most OPEC countries have been running healthy surpluses in recent years. Saudi Arabia, for instance, has not only been earning more than it expected due to higher prices, but also because of higher volumes.

Thus, a shortfall on oil prices ought not to immediately imply a budget crisis, at least in member states like Saudi Arabia, Qatar, the United Arab Emirates, and Kuwait, that together dominate the policymaking apparatus within OPEC.

None of the foregoing analysis, however, should be construed as concluding that OPEC is not concerned about the state of oil market today. There is a heightened awareness of the present soft state in the market but no serious conclusions have yet been drawn about the pace of oil market growth later this year.

Traders should not forget OPEC is in a stronger position now than it was a year ago when it comes to dealing with the market. The group has always been more successful at managing downside risk in the oil price than capping upward rises.

That, and the fact that the price of crude is still very comfortable for all but the most profligate OPEC members, suggests the group will continue to observe the market for some time yet.

(Editing by Marguerita Choy)

(Robert Campbell is a Reuters market analyst. The views expressed are his own)

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