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OPEC reaches agreement. Production increase of 1.7 million barrels per day. Mexico and Norway add 250,000 barrels per day.
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After extended negotiation, OPEC reached an agreement to increase production by 1.45 million barrels per day. Iran opted out of the agreement, but says it will increase production to avoid losing market share.  Iran claimed it's position was based upon an objection to U.S. pressure.  The fact that Iran, with limited excess capacity, would have difficulty in meeting its share of increased production indicates that their opposition to increases is based upon factors other than an objection to political pressure. If Iran can meet its proportionate share, the effective OPEC increase is 1.7 million barrels per day.

Last year the official limit was 22.976 million barrels per day.  The unofficial limit is now 24.676.  The table below shows the current quotas for the OPEC 9 and the implied quota for the OPEC 10.  Iraq under United Nations sanctions is not assigned a quota.

The process is as important to the agreement as the quota. In our pre meeting analysis we outlined three things necessary to achieving a soft landing for crude prices. First, a reasonable but not too large quota.  Second, a publicly announced price target. Third, a short term adjustment mechanism.  These conditions have been satisfied. 

  1. The increase is reasonable but not too large.
  2. Saudi Arabian Oil Minister Ali al-Naimi has announced a target price range of $20 - $25 for Brent.  This translates to $21.50 - $26.50 for West Texas Intermediate.
  3. OPEC will meet again in June  to make adjustments, if needed, to meet price targets. Algerian Mining and Energy Minister Chakib Khelil said OPEC will make automatic adjustments of 500,000 barrels per day between meetings if crude prices move outside a range of $22 - $28 dollars per barrel. 
The scheduled meeting, just three months away, will add stability to the market and encourage refiners to build inventories. The addition of the automatic adjustment mechanism will add further stability to the market. Refiners have been wary of replenishing stocks in a market with lower future price expectations. With the structure of the current agreement we can expect refiners to increase inventories.

Throughout the meeting there were two major camps. One camp was led by Saudi Arabia and the Arab Gulf member states which wanted a 1.7 million barrel per day increase. The other was headed by Iran which  wanted to limit increases to 1.2 million barrels per day.  The Iranian camp feared that increased Iraqi production would result in a price collapse. Iran's fears were also founded on the fact that the second quarter of the year is characterized by lower demand for crude oil.  [ More information on seasonal demand is in our pre meeting report. ] In the end the Saudi camp prevailed and Iran refused to participate in the agreement.  While Iran has not formally participated it has effectively done so and its actions do not signal an impending breakup of the cartel.

Venezuelan Oil Minister Ali Rodriguez was named OPEC President.

Following the meeting, Mexico announced an increase of 150,000 barrels per day.  This is considerably less that the expected 200 - 300,000 barrels per day. Two days after the OPEC meeting adjourned, Norway announced a 3.2 percent production increase of 100,000 barrels per day.

The market expects some cheating, but many of the countries usually involved in overproduction are at or near capacity.
 

OPEC Crude Oil Production Quotas1
April 1, 1999 
Quota2
March 28, 2000
Quota2
Country (thousand b/d) (thousand b/d)
Algeria 731 788
Indonesia 1,187 1,280
Kuwait 1,836 1,980
Libya 1,227 1,323
Nigeria 1,885 2,033
Qatar 593 640
Saudi Arabia 7,438 8,023
United Arab Emirates 2,000 2,157
Venezuela 2,720 2,845
OPEC 9
19,617
21,069
Iran
3,359
3,6234
OPEC 10 22,976 24,692
Iraq3 NA NA
TOTAL OPEC NA NA
NA: Not Applicable
1. Crude oil does not include natural gas liquids or lease condensate.
2. Quotas are based on crude oil production.
3 Iraqi oil production is constrained by the United Nations' export limits and is not a part of OPEC agreements
4 Iran is not a part of the current agreement. 
 

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Copyright 2000 by James L. Williams 
 
James L. Williams
WTRG Economics 
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