Meeting described as 'one of the worst we've ever had' by minister

AMSTERDAM/LONDON/CAIRO - OPEC failed to agree on crude oil production for the first time in at least 20 years, with six members opposing a Saudi Arabian push to increase output, sending oil prices above $101 a barrel.

"It was one of the worst meetings we've ever had," Saudi Oil Minister Ali al-Naimi said as representatives of the 12-member Organization of Petroleum Exporting Countries left the meeting in Vienna on Wednesday after five hours of talks. "We were unable to reach an agreement."

Crude in New York jumped 2.7 percent in the 20 minutes after the meeting ended. The split underscores growing divisions within the group that accounts for about 40 percent of the world's crude. Saudi Arabia, OPEC's largest producer, Kuwait, Qatar and the United Arab Emirates proposed increasing group output by 1.5 million barrels a day to 30.3 million barrels. They were blocked by members including Iran and Venezuela, which warned of a "collapse" in prices.

"We expect OPEC's credibility to be damaged by the meeting's outcome," said Serene Lim, a commodity strategist at Australia & New Zealand Banking Group Ltd in Singapore, who forecast oil will average $105 a barrel in New York this year. "The divide among the Arab states as well as the inability of Saudi Arabia to control the group may be a supporting factor to prices."

Mike Wittner, the New York-based head of oil-market research at Societe Generale SA, said: "It's a bit surprising because the Saudis usually get their way. There were very diverse opinions going into the meeting and, even looking at the fundamentals, there were different signals."

Wittner said before the meeting there was a 65 percent chance OPEC would decide to raise production.

A Bloomberg survey of 30 analysts conducted from May 24 to 31 showed that 27 believed the group would probably leave its output quotas unchanged.

"This is crude bullish as there is certainly no consensus within the group and OPEC is not ready to act united," said Andrey Kryuchenkov, an analyst at VTB Capital in London who correctly forecast the group wouldn't change its target. "The market remains undersupplied."

'Disconcerting'

OPEC's spare production capacity is poised to dwindle, David Greely, a New York-based analyst at Goldman Sachs Group Inc, said on Wednesday.

Rising global demand for oil will exhaust the group's surplus capacity next year, said Goldman, which forecast on May 24 that Brent crude will rise to $120 within six months and to $130 within a year.

While the lack of coordination appears "disconcerting, the fact remains that the vast majority of OPEC spare capacity remains in Saudi Arabia", Greely said. "Consequently, it still remains a question of Saudi's willingness and ability to raise production to keep pace with world oil demand growth."

Saudi stretched

It will be a "stretch" for Saudi Arabia on its own to add the 1.9 million barrels of daily oil output needed to meet the 30.87 million barrels of daily demand OPEC forecasts in the third quarter, JPMorgan Chase & Co analysts including New York-based Lawrence Eagles wrote on Wednesday. The bank reiterated its forecast that oil will reach $130 a barrel in 2011.

Crude has gained 11 percent this year, boosting revenue for producers while raising concern that price gains will stunt economic growth and stoke inflation.

The US Labor Department said on June 3 that employers added 54,000 workers to payrolls in May, the fewest in eight months.

The International Energy Agency trimmed its 2011 forecast for oil demand last month for the first time, after saying on April 12 that prices above $100 a barrel are starting to hurt the global economy.

Iran, the group's second-biggest producer, has historically taken a harder line on prices than its regional rival Saudi Arabia. Constrained by economic sanctions over its nuclear program, it is pumping at close to full capacity.

New powerhouse

"Iran has replaced Saudi Arabia as the powerhouse in OPEC," said Olivier Jakob, managing director of Geneva-based Consultancy Petromatrix.

Besides Iran and Venezuela, OPEC members opposing a higher production ceiling were Libya, Angola, Ecuador and Algeria. Venezuela was concerned crude prices would tumble if OPEC increased quotas, the country's oil minister said in an interview with state television.

"There was a proposal to raise output by between 1.5 million barrels a day and 2 million," Rafael Ramirez said. "We, given the uncertainty in the market, thought that could cause the price of oil to collapse."

They were "vehemently against increasing production", Saudi Arabia's Naimi said, adding that he and his group tried for several hours to persuade the other six of the need for more oil.

"In 16 years, I've never seen (such) an obstinate position," he said.

Mohammad Aliabadi, the acting Iranian oil minister and current OPEC president, described the meeting as "polite and cordial".

"I don't know why he called it the worst meeting," Aliabadi said.

Bloomberg News

(China Daily 06/10/2011 page14)