OPEC : Cartel craking down ?

For the first time in almost 30 years, OPEC failed to reach an unanimous agreement on desired output levels. Listening to the comments coming out of the meeting, some were very outspoken. Next to the fact of being the "worst meeting ever", Saudi Arabia's Naimi declared "that in my 16 years' experience, I have never seen such an organized vehement opposition against increasing production". The Iranian delegate Aliabadi sounded a different tune :"The meeting was polite and cordial, I don't really know why Naimi called it the worst meeting ever.". Is this a one off event or a prelude of more to come ?

The outcome of the meeting was quite a surprise because analysts had banked on a 66% chance that OPEC would raise its production quota. Market conditions would have urged for this because at current production levels of 29 mio barrels a day, output runs short of about 2 mio in order to meet expected world demand from Q3 onwards.

The ones in favor of rising production quotes, were Saudi Arabia, Kuwait, Qatar and UAE. Voting against were Venezuela, Iran, Libya, Angola, Ecuador and Algeria. And already here, we have some clues of what has been going on : a battle of the axis of Western allies against the axis of what former president Bush would have labeled as "evil". How come the latter won the battle and which factors have determined the outcome ?

First of all, from a political point of view it should not come as a surprise the Western allies of the Gulf lost the battle. The atmosphere was already troubled by the news that Qatar was supporting Libyan rebels against Gaddafi. Saudi Arabia on the other hand angered Shi'ite Iran by deploying military aid in Bahrain to fight Shi'ite rebels in their attempt to overtake a Sunni led government. So those primarily politically opposed to US geo-politics and their allies, found enough support to tackle Saudi Arabia. And for Saudi Arabia, this doesn't bode too well. Saudi Arabia has always been perceived as a reliable partner in the West, securing oil supply at a reasonable price. If this no longer holds and powerhouse Iran succeeds in taking over OPEC control, the West has a new opponent to get serious about. China and other non-OPEC members such as Kazachstan and Russia will monitor this closely and with interest from the sidelines.

Second, the recent Middle East uprising was also triggered by an acceleration in increasing food prices since the last quarter of 2010 (QE II ??). It is therefore highly likely that some OPEC members were afraid that a price drop would hurt domestic tax revenue, this at a time numerous citizens were complaining about sky-rocketing cost of basic needs. And hence, stable tax revenue will be crucial in order to buy off complaints of the population by means of subsidies and grants.

Will Saudi Arabia go on its own and increase its own production level to fill the future supply gap ? Mr Market does not appear to be convinced on this issue, looking at how brent crude reacted and the following upward revised price targets set by various leading brokers. Barclays for instance sees price risks being skewed heavily to the upside. JPM reiterated its forecast that crude will hit $130 a barrel this year. At a time we need good news for a world economic recovery, this is not exactly what we were looking for.