OPEC Sees Lower Oil Demand for 2011

24/7 Wall St.

Crude oil prices rose about 3% yesterday primarily on the news that the France and Germany would do something to shore up their banks. Equities also rose by about the same amount, with the S&P 500 up about 3.5%. That euphoria about the global economy is not shared by the Organization of Petroleum Exporting Countries (OPEC), which has trimmed its forecast for oil demand by 180,000 barrels/day in its latest Oil Market Report.

Demand for crude is expected to reach 87.8 million barrels/day in 2011, an increase of 900,000 barrels/day over the 2010 level. For 2012, demand for OPEC crude is expected to be steady at 29.9 million barrels/day, a drop of 100,000 barrels/day since last month’s report.

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As for prices, Brent crude closed yesterday at about $109/barrel, while WTI closed at about $85/barrel. Both are down about -0.5% early this morning. The OPEC reference basket is priced at about $105/barrel this morning. The cartel would not like the reference basket price to fall below $100/barrel.

Libyan crude oil, or rather the absence of it, has driven the Brent-WTI differential to around $25/barrel. The differential is being pushed by demand for light Nigerian crude, which is a good substitute for the missing light Libyan crude. In September, Libyan production grew to 96,000 barrels/day, from just 7,000 barrels/day in August. That’s still a long ways from the 1.3 million barrels/day that Libya produced before the country’s civil disturbances began earlier this year.

Last month OPEC suggested that Libyan production could reach 1 million barrels/day within six months. The August report even concluded that full Libyan production could be restored in less than 18 months. This month’s report does not offer any further forecast for Libya, so either OPEC is still satisfied with last month’s prediction or the cartel doesn’t have a clue.

Restoration of Libya’s production remains the cartel’s chief concern. If production can rise to previous levels in a year and a half, then the other members will have to reduce their production in order to keep prices where they are now. Individual members, especially Iran and Venezuela, which have argued for reduced production could get a more sympathetic ear at the cartel’s next meeting in December.

OPEC would like to avoid its long-standing difficulty with enforcing quotas. The first step would be to pin a floor price for the reference basket below which production would be slowed. So far no floor price has been set. The December meeting may spend a good deal of time on this point.

Then, of course, once the floor is set, the cartel needs to set new quotas. That’s another acrimonious argument.

Paul Ausick