With the possibility that demand for Iranian oil may fall below 1 million barrels a day (mbd) as sanctions continue to bite, Iran has announced that it wants OPEC to cut back production to the agreed quotas, rather than the overall additional 1 mbd that is actually being produced and sold. Such a move would, of course, make it more difficult for those customers who have found a way to replace Iranian oil, and perhaps incline them more toward disregarding the embargo.

OPEC has just released their December Monthly Oil Market Report (MOMR) in which they anticipate that earlier projections for 2013 oil demand growth will still be valid at 0.8 mbd. (Though they note that December 2012 growth y-o-y was at 1.0 mbd as the US economy continued to improve). They expect that all of this increase will be met by non-OPEC increases in supply, and that demand for OPEC oil may even drop 0.4 mbd. Part of that projection continues to rely on increased US crude production, and the EIA TWIP of December 5th had the latest chart showing that projected growth, based on the newly released Annual Energy Outlook 2013.

As a footnote to that graph, the Alyeska pipeline pumped an average of 582,755 bd in November, which brings the annual average up to 544, 625 bd. It is clear from looking at that plot that the gains in production are assumed to come from increased production of the "tight" oil deposits that have produced the overall gains achieved to date. The optimism of this projection goes a little beyond the levels that I anticipate will be achieved.

With the turmoil in the Middle East and North African countries (MENA) now more evident in nature, the impacts on global oil production can be more rationally assessed. In this vein, the OPEC Monthly Oil Market Report (MOMR) for June has now been released. The main feature article looks at the prospects for the rest of the year, and as Leanan caught in Drumbeat, one of the major concerns has to be that OPEC supply, at current levels (28.97 mbd), does not reach the anticipated average demand for the year (29.9 mbd). However, putting that in context, MOMR begins by noting that the price of the OPEC basket fell $8.15 in May, to $110/bbl, so there are mixed signals in the air. Further, OPEC currently reports that they collectively supplied an average of 29.6 mbd in 2010, so that the increase in supply needed over last year is only 0.3 mbd.

As I mentioned earlier in the week, the disputes within OPEC have so far left the organization unwilling to sanction the increases needed to meet the anticipated imbalance. Whether this is a ploy by Saudi Arabia (KSA) to appear “friendly” to the customer, while bowing to majority rule and keeping supply tight enough to force prices higher, or whether the KSA will unilaterally release more oil is currently in question. The level of increase that KSA has suggested, 1.5 mbd, may appear to be larger than that needed to bring supply and demand into balance. Demand is seasonal, however, and is expected to maximize in the third quarter, during which global demand is expected to rise some 2.3 mbd, with growth continuing with a further addition of 0.2 mbd in the fourth quarter. Thus, in that context, it is interesting to see how the MOMR reflects the current organizational view of the next six months.

The impacts of the disruptions in the Middle East are now starting to become evident as supplies no longer flow into the delivery pipelines that carry fuel from countries such as Libya to their European customers. It is now considered likely that the 1.6 mbd that Libya delivers to the world market will not be available for some time. Ireland, for example, which has had other problems with the banks in the recent past, is now faced with the loss of perhaps 23% of its fuel supply, which while only 14 kbd is, for that country, likely to be very significant. For while the Libyan shortage at present may be just due to Gadhafi ordering the ports closed, if he is also ordering the destruction of facilities, as is rumored, then the consequences may be more long term. ENI has reported that the Libyan shortfall is currently 1.2 mbd.

It is in this context that the world turns to OPEC, which has stated that it has enough oil in reserve to stabilize deliveries, and looks to see a compensating production increase from those nations with that potential. And here is the rub, for some OPEC countries are themselves in a little political difficulty which might negatively impact their own production, while those that can, in the short term, increase flow volumes to match the shortfall are likely all called Saudi Arabia.