Post Opec


OPEC members failed to agree to raise the official output quota at yesterday's (June 8) meeting. Given political tensions in the region and Iranian control of the OPEC presidency, I am not surprised.

OPEC members have consistently failed to comply with quotas. For the previous month, the compliance rate was 69%. Oil production currently is 26.12 million barrels per day (mbd), well above the agreed-upon December 2008 quota of 24.845 mbd.

What is most important to me is the shift within OPEC. In the past, Saudi Arabia held sway on other members; the Iranians now have an equal voice.

So, as global demand for oil rises further in the second half of 2011, the question becomes: "WHERE DOES NEW SUPPLY ORIGINATE?" If not OPEC, then where? Obviously, non-OPEC production must increase. However, based on the evidence, I am concerned non-OPEC production cannot cover an increase in global demand.

A look at the numbers:

· OPEC provides 40% of global oil supply

· Quarter-on-quarter global supply demand balance has shifted from a surplus of 3.2 mbd to a deficit of 100,000 barrels per day

· Demand increased 10% in China, 6% in India, 3% in Brazil, and 1% in the U.S. for the most recent quarter.

· Demand from Japan fell 4% in the most recent quarter, but that is transitory and will increase in the second half of 2011

· Non-OPEC supply from the U.K., Norway and Mexico all declined in the most recent quarter.

· Loss of Libyan oil output (1.4 mbd) will take many months to return online in a post Muammar Gaddafi-secure Libya

To borrow President Obama's phrase when it comes to oil, "there are no quick fixes." Both China's and Canada's production have increased this year. However, if conditions remain constant, Canada and China cannot on their own meet rising global demand. Domestically, the need to increase production from the Gulf of Mexico is imperative. I may have lowered my outlook on energy from "overweight" to "market weight" on May 4, but I am rather certain my next move will be to raise it back up again to "overweight" as further evidence suggests the strain on global spare capacity is becoming too great.

Past performance is not a guarantee of future results.

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