OPEC and production cuts

OPEC met on 4 December 2003 and decided against any new production quota cuts, opting instead for better quota compliance in the wake of media reports that OPEC 10 (OPEC excluding Iraq) had shown poor quota compliance during November. OPEC's surprise decision to cut its production quotas at its September 24 meeting had led to concern by importing nations that OPEC was ready to cut production quotas again.

According to the US Energy Information Administration (EIA), the market situation facing OPEC today is different now than it was for its September meeting. Despite OPEC's reported poor compliance, the price for a basket of OPEC oils was $3 per barrel higher on December 4 - near the top of OPEC's target range - than it was on September 24, when it was near the middle of the target range. The December 4 price was also well within the higher price band of $25-$32 per barrel proposed by Venezuela, which had been the most vocal OPEC member supporting higher oil prices.

Despite the decision to keep production quotas unchanged for the time being, OPEC 10 appears inclined towards cutting its production in 2004 in order to maintain prices near current levels. Although world oil demand is expected to grow roughly as fast as non-OPEC production in 2004, the expected growth in Iraqi oil supplies next year will likely put pressure on OPEC 10 to cut its own production in order to maintain a balanced market. EIA projects that total OPEC (including Iraq) production will not be much changed in 2004 from current levels.

EIA's Outlook uses the current Iraqi export targets for the near-term. If the current targets are met and Iraqi oil exports reach 2 mbd by the end of the first quarter 2004, Iraqi production (unadjusted for re-injection or other factors) would then be 0.5 mbd above average November 2003 levels.

Because Iraq has had security-related difficulties re-opening export outlets for oil production from its northern fields, it has been forced to re-inject up to 0.3 mbd of its production. A resolution of these difficulties would not only allow Iraq to increase its exports, but would also free up the oil that had been re-injected for export to world markets. The release of this additional 0.3 mbd of Iraqi oil to world markets could ultimately mean that some additional response is required from OPEC 10.

EIA's current Outlook assumes that Iraqi will not be able to reach its pre-war production and export levels until 2005. However, the current Iraqi production targets rely on security being maintained within Iraq. Since EIA's Outlook focuses on total OPEC production, it assumes that any shortfall in Iraqi production will be made up by OPEC 10.

The return of Iraqi oil has raised the question of whether Iraq is ready to rejoin the OPEC quota system. If it does rejoin, there will be the difficult issue of how to divide the total OPEC quota between Iraq and the other OPEC members. OPEC 10 has been able to postpone the re-allocation question in 2003, when most of the OPEC 10 members were able to produce near full capacity levels. However, the return of Iraq may force OPEC to address the question sooner rather than later.