By Jason Simpkins
Managing Editor
Money Morning
The Organization of Petroleum Exporting Countries (OPEC) will likely maintain its crude oil production quotas at its meeting in Vienna, Austria tomorrow (Thursday).
Saudi Arabia's oil minister, Ali Naimi, has indicated that while demand is beginning to pick up, inventories remain dangerously high. Therefore, it would be best for the cartel to "stay its course" by continuing to adhere to previous production cuts until demand stabilizes.
After soaring above $147 a barrel last summer the price of oil tumbled more than 80% to a four-year low of $32.70 a barrel in February. To combat the sharp decline in prices, OPEC has lowered its production quotas by 4.2 million barrels per day (bpd) - about 5% of global demand - since September.
Since February, oil prices have recovered, climbing to their current level above $60 a barrel. But both Naimi and industry analysts have warned that the rally has more to do with market sentiment and the potential for a recovery than it does fundamentals.
"The price rise is a function of optimism that better things are coming in the future," Naimi told reporters earlier this week.
The International Energy Agency (IEA) estimates global oil consumption will fall by 2.6 million bpd this year. That would be the biggest drop since 1981.
Naimi says that world crude inventories - at current levels - would be sufficient enough to meet about 62 days of global demand. OPEC members would like to see them fall to about 52 to 54 days worth of demand.
An increase in OPEC production "will not happen until we are sure that global inventories return to their normal levels," Naimi told the Arab daily Al-Hayat.
U.S. crude oil inventories rose to the highest level in two decades earlier this month. However, Naimi did note that demand in Asia, particularly China, seems to be accelerating and crude prices could reach $75 a barrel by the end of the year.
Still, analysts are urging caution, as production quota compliance among OPEC nations is beginning to wane. Production compliance among OPEC nations reached 85% in March - an impressive level by historical standards. Members only delivered on 78% of the promised cuts in April as prices recovered.
Saudi Arabia, OPEC's largest and most influential producer, actually pumped below its target level in April, but other members have been cheating. Iran, OPEC's second-biggest producer, accounted for 410,000 bpd of the overproduction last month, while Angola exceeded its target by 170,000 bpd and Venezuela overproduced 130,000 bpd the IEA reported.
"Lagging quota compliance by the non-Gulf Arab states - hovering around 50% - has hamstrung any real discussion of a potential cut to accelerate the drawdown of the glut," PFC Energy analyst David Kirsch said in a report today. "Purported requests by Angola to revise or suspend its quota, as well as moves by Venezuela to certify a higher production figure leave any proposal for further output restraint effectively stillborn."
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