By pumping far more oil than its quotas allow, OPEC could flood the market and lower oil prices. (image: wsj.net)

Oil production in OPEC grew in May even as the price of a barrel of crude fell from a high above $87 towards $70. With OPEC members in violation of their quotas, and the cartel as a whole exceeding its production target by roughly 2 million barrels per day, OPEC could increase oil supply enough to lower oil prices, possibly even forcing the price of crude oil below the group’s target range of $70–$80 a barrel.

The news site 24/7 Wall St. reports that OPEC’s total production hit a 17-month high in May, with all OPEC members exceeding their quotas. OPEC members have boosted production to chase the profits that come with high oil prices, and with crude prices in the low $70s per barrel there is little incentive for individual members to cut back.

Growing production can sometimes run up against the limits of storage, both onshore and offshore, but there’s more storage available now than there was a year ago. According to the Danish shipping company A.P. Moller-Maersk, cited by 24/7 Wall St., there are 25 oil tankers being used for floating storage—at this time last year there were double that number.

With room to store the oil and profits to be had, OPEC could continue to produce oil well above its quota. A greater supply of oil would pressure oil prices to fall, but there is likely a floor for crude oil prices below which OPEC would take decisive action to curb production.

According to Dow Jones Newswires, that floor is $65 a barrel. Working with slightly different figures than 24/7 Wall St.—OPEC’s workings are far from transparent, so no definitive data are available—Dow Jones believes OPEC is showing some restraint, though the news service still says that the cartel’s total output increased by 1.9 percent in May. By their calculations, most of that increase came from Iraq, whose production is not currently bound by a quota.

From the perspective of the market, though, it matters little whether a barrel of oil came from Iraq or the United Arab Emirates—supply is supply, and if production grows more quickly than demand, oil prices could fall. Though OPEC would not stand still and let oil prices collapse, heating oil users could benefit from the current lack of compliance by OPEC members through lower crude and heating oil prices.

Crude oil prices below $70 a barrel could trigger an OPEC meeting (like the one pictured above) and stricter enforcement of production quotas. (image: AP via sulekha.com)

Just over one month ago, when oil prices were rising, Kuwait’s oil minister said that OPEC wouldn’t consider increasing oil production to combat high oil prices that could threaten economic recovery until the price of crude oil hit $100 a barrel. Now that crude oil prices have declined by 17 percent in May, even falling below $70 a barrel at times on Monday, BusinessWeek reports that oil analysts are wondering when OPEC will cut output to prop up oil prices.

For months OPEC has affirmed its satisfaction with current oil prices. In December, Saudi oil minister Ali al-Naimi said oil prices between $70 and $80 a barrel were “perfect,” and OPEC general secretary Abdalla El-Badri has said that prices between $70 and $90 a barrel provided incentive to producers to expand production without being so high that they would force people to cut consumption. A price below $70 a barrel “does not give [OPEC members] an incentive to invest,” said Qatari energy minister Abdullah bin Hamad al-Attiyah on Monday. Kuwaiti minister Ahmad Al-Abdullah Al-Ahmad Al-Sabah said that if crude oil hit $65 a barrel it would “ring a bell” for OPEC to act before their next scheduled meeting in October.

Though OPEC has not changed its production quotas since December 2008, when it cut output sharply because of lost energy demand during the recession, compliance with those quotas has eroded as members ramp up production in pursuit of greater profits. If OPEC decided to restrict oil supply and keep prices high enough to encourage further oil exploration, the cartel could do so simply by enforcing existing quotas rather than changing quota levels.

These recent statements by OPEC members effectively put a price floor of $65–$70 on crude oil. While heating oil users can expect lower prices as falling prices on the NYMEX translate into lower retail heating oil prices, OPEC stands prepared to limit how far oil prices may fall. Having survived the 2008 collapse in oil prices when crude oil traded for as little as $33 a barrel, OPEC is determined not to let prices reach those lows again. For heating oil users, that means the ultra-cheap heating oil of a little over a year ago may not soon return.

Oil spills, debt crises, and volatile prices have not dampened OPEC’s optimism on oil demand in 2010. (image: wikimedia.org)

While oil traders evince jitters over the debt crisis in Europe and the oil industry tries to withstand the negative publicity of the BP oil spill in the Gulf of Mexico, OPEC remains unruffled and has even raised its forecast for global oil demand in 2010. Their confidence influenced oil markets, and pushed up the price of crude and heating oil on Tuesday morning.

As Reuters reports, this the third consecutive month in which OPEC has raised its forecast for oil demand. In its latest monthly report, the oil cartel said that 2010 oil demand would rise by 950,000 barrels per day (bpd) from 2009 levels. That prediction is 50,000 bpd higher than OPEC’s previous forecast.

“The recent signs of improvement in the global economy have been encouraging,” said OPEC, affirming the conventional wisdom that economic recovery will lift oil demand in 2010. But OPEC also stated that rising oil demand could be reversed if oil prices, and especially the price of gasoline, moved too high:

“Any strong and lasting increase in pump prices will certainly dent demand, not only in the United States, but also across the globe.”

Despite OPEC’s concern in its monthly report about the prospects of demand destruction, as recently as April representatives of OPEC member states indicated that they wouldn’t take any action to halt rising oil prices until crude oil hit $100 per barrel.

OPEC’s forecast gave some support to oil prices on the NYMEX, and other reports by major oil forecasters could also move the markets this week. The Energy Information Administration (EIA) will release a report on Tuesday, and the International Energy Agency (IEA) will release its report on Wednesday. If these agencies follow OPEC’s lead and increase their 2010 oil demand forecast, it will bolster optimism among oil traders and could drive up the price of crude oil and refined products such as heating oil, gasoline, and diesel.

Oil prices have moved above OPEC's preferred range, but the cartel has no plans to raise output. (image: topnews.in)

Not long ago the oil minister of Saudi Arabia, Ali al-Naimi, proclaimed that the price of crude oil was “perfect” between $70 and $80 a barrel. But as prices have crept above $80 a barrel, hitting an 18-month high of $87.09 on April 6, OPEC has made no sign that it plans to increase output to combat rising prices. Now OPEC representatives have indicated they would be content with prices at $90, $95, or even $100 a barrel.

The price range of $70–$80 seemed perfect because it offered profit for producers without pushing the price for gasoline, heating oil, or diesel so high that it curbed consumer demand and stunted economic growth. Many authoritative analysts of the oil industry—most recently the International Energy Agency (IEA)—have warned that oil prices above $80 could start cutting into the consumer spending that’s expected to lift the global economy out of recession. “Ultimately, things might turn messy for producers if $80-$100 is merely seen as the new $60-$80,” said the IEA. If OPEC recognized that in December, why don’t they recognize it now?

According to the head of Libya’s National Oil Corporation, Shokri Ghanem, the push above $80 a barrel may only be a fluke, reported Reuters. When asked about the current oil price, Ghanem said, “What we are seeing in the market is a kind of fluctuation that we cannot build a policy on.” Reuters cited other unnamed OPEC representatives as saying that $90 or $95 per barrel might be the price trigger for OPEC to consider formally increasing oil production.

The oil minister of Kuwait, Sheikh Ahmed al-Abdullah al-Sabah, named a different price at which OPEC would take action: $100 a barrel. He added that current oil prices were not interfering with economy recovery, and that Kuwait was pleased with the current price level, Bloomberg reported.

In recent months OPEC has at times sounded like a consumer advocate, railing against speculation for artificially inflating oil prices and vowing to fight price volatility. The group has even looked the other way as members violate production quotas and add supply to an already oversupplied oil market. However, OPEC’s inaction as oil prices move further away from perfect seems to confirm suspicions that OPEC can’t resist the pull of higher profit margins, even if they run counter to the cartel’s long-term interests.

Reuters points out that OPEC has a history of naming price targets and then doing nothing as prices soar. In 2004, OPEC stated a target of $22 to $28 a barrel, but declined to raise output as prices moved higher. In 2009, crude oil at $50 per barrel satisfied OPEC, which didn’t want to stifle any economic recovery, but now OPEC members say oil may have to reach double that price before quotas are raised. And even if the price of crude oil does hit $100 per barrel, OPEC may decide that it’s comfortable with that price, too—or prices that climb even higher.

Steady oil prices for the next decade is what OPEC's newest study predicts. (image: travelblog.org)

A yet-to-be released study expects oil prices to remain in the $70-80 range for the next ten years, says CNBC.

Conducted by OPEC, the report and its fuller details will become public on Tuesday and Wednesday during a presentation at the 12th International Energy Forum (IEF) conference in Cancun, Mexico. United Arab Emirates 24/7 reports that excessive speculation and the global financial crisis are factors in the report’s result.

The IEF is the world’s largest assembly of energy ministers. It holds a unique position in the energy industry because it’s committed to informal dialogue, not policy recommendations or preparation, and because it invites nations that are often excluded from global assessments of energy due to their non-OECD status. Countries such as China, Brazil and India are of an equal or superior importance to the current global energy picture than the advanced western economies, as they are poised to consume the lion’s share of the world’s energy in coming decades. Because they are not OECD members (and therefore, not International Energy Agency members), they operate outside of the kind of monitoring and international data-collection upon which the rest of the world relies.

The meeting on March 30 and 31st will include an assessment of future global oil demand. Energy ministers from over 60 countries will be in attendance, including Brazil and Russia, as well as the CEOs of oil industry heavyweights Exxon Mobil, ConocoPhillips, Royal Dutch Shell, and Total.

Oil minister of OPEC member United Arab Emirates, Mohamed al-Hamli. (image: boston.com)

Speaking at a conference in Geneva, two ministers of OPEC member states expressed their organization’s strong support for regulations on oil speculation, which the ministers believe is driving current prices. The Boston Globe reported on Tuesday on the comments, given to press in Geneva on Monday.

“Prices are driven by something totally unrelated to supply and demand,” said Germanico Pinto, OPEC’s president and Ecuador’s oil minister. The minister made clear his belief that “acute and excessive price speculation” is that driving force.

Pinto’s comments come just a few days after OPEC’s latest meeting in Vienna, at which the cartel agreed to maintain current production levels, citing contentment with current prices.

The most telling comment at Monday’s conference in Geneva came from the United Arab Emirates’ oil minister Mohamed al-Hamli:

We always have problems with speculators, especially noncommercial speculators. We need some regulation, because we see prices very high and very low and sometimes they attribute this to OPEC.

OPEC is often demonized as a hugely powerful group of oil-producing nations whose greed is the main cause of unstable and/or high prices for consumer petroleum products like heating oil and gasoline. In recent years, OPEC has sought to deflect some of that blame onto oil market players who have no interest in purchasing physical oil, but buy and sell oil futures contracts to turn a profit, known as speculators.

Over the last few months, the prices of crude and other exchange-traded petroleum products, including heating oil, have been rising steadily, despite sluggish global demand and huge excess supplies of products around the world. With prices moving counter to basic macroeconomic forces, many observers inside and outside the oil industry have singled out unchecked speculation as the main cause.

The US Commodities Futures Trading Commission has proposed limits on how many oil contracts large speculators (like investment banks and hedge funds) can hold at once in an attempt to reduce those investors’ outsized influence on prices. Al-Hamli explicitly endorsed the CFTC proposal, which remains in a 90-day public comment period.

While OPEC’s support for action to limit speculators’ influence on oil prices will do little to speed up enactment of such regulations in the US or the UK, the cartel will no doubt continue to express its view, which will at the very least keep the issue in the spotlight.