OPEC: Making hay while the sun shines

All indications so far are that the 12-member producers' club -- they hate to be known as a cartel -- will agree to maintain the current production target of 24.845 million b/d for the OPEC-11 for a while longer, a decision that Qatar's veteran oil minister Abdullah al-Attiyah flagged at the weekend.

OPEC's choices are limited, Attiyah told a Saudi-owned newspaper. At above $80/b, prices are within the range that Saudi King Abdullah has often stated is the kingdom's desired price level, and amid signs of a global economic recovery, OPEC will certainly not want to see higher prices derail that turnaround.

An output cut is not therefore on the cards, although several ministers and officials have expressed concern about the high level of stocks in consuming countries. A senior Kuwaiti official recently said they were still far too high at 59 days of forward cover.

One way to shrink stocks would be for the 11 OPEC members bound by output restraint -- Iraq is excluded -- to adhere more closely to their output allocations, which some members appear to regard not as fixed quotas but as movable targets.

The level of compliance with targets under a 24.845 million b/d collective target has declined from above 80% just after the accord came into effect in January 2009 to 54.4% in January this year and 54.64% in February, Platts' OPEC surveys show. OPEC ditched references to "quotas" in favor of the gentler "targets" a few years ago.

But while ministers publicly have  grumbled about falling compliance, OPEC's formal communiques have made no specific reference to the issue nor called for stricter discipline, implying that overproduction will be tolerated so long as oil prices remain within the $70-$80/barrel range.

Indeed OPEC now sees oil price volatility as the key threat to this market stability, a concern they share with oil consumers and a topic that will feature highly at the Cancun talks.

So OPEC will allow its members to make hay while the sun shines (in Cancun if not in Vienna) and is likely to want to avoid causing any splits at a time when rising tension over OPEC member Iran's nuclear program and ethnic tensions in Nigeria have injected a premium into oil prices.

Iraq's plan to expand its oil production capacity to above 12 million b/d within seven years from 2.5 million b/d will no doubt be on the minds of OPEC's delegates as one thorny complication to be tackled some time in the future. At that time, quotas or targets will undoubtedly need to be reallocated, but not before what is expected to be some horse trading with those who will lose market share.

So for now, the only change that the ministers are likely to preside over is a new building that the OPEC secretariat moved into last November in Vienna, the organization's home since 1965. The earlier building has been home since that time when OPEC moved its headquarters from Geneva to the banks of the Danube River.