OPEC TO RAISE PRODUCTON QUOTA?

C O N F I D E N T I A L ABU DHABI 003095

SIPDIS

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4500/ITA/MAC/DAS/WILLIAMSON
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E.O. 12958: DECL 05/26/2014
TAGS: EPET ENRG ECON TC
SUBJECT: OPEC TO RAISE PRODUCTON QUOTA?


(U) Classified by Ambassador Michele Sison for reasons 1.5
(B) and (D).


1. (C) Summary: Ministry of Petroleum advisor Dr.
Ibrahim Ismail (protect) told EconChief that he
thought that OPEC Ministers would raise the
production quota by 1-1.5 mb/d to reflect at least
some of OPEC's current overproduction and to help
calm the markets. He also said that the ministers
would consider whether or not to raise the OPEC
price band from its current level to encompass the
average price this year OPEC's Oil Basket. (The
OPEC Oil Basket is averaging $34 this year.) He
noted that, except for Saudi Arabia and, to a much
lesser extent, the UAE, OPEC members were producing
at capacity. End Summary.


2. (C) EconChief met with Dr. Ibrahim Ismail, the
Economic Advisor to the Minister of Petroleum on
September 13. Ismail said that OPEC (excluding
Iraq) was already producing 1.5 mb/d .8 mb/d
above quota and that most were producing at or near
capacity. He added that he thought that OPEC
ministers would decide to "legitimize" the
overproduction with a decision to raise the
production quota by 1-1.5 mb/d. He thought that
this action would help send a calming signal to the
markets and might/might encourage some producers to
bring more production on line.


3. (C) Dr. Ismail also said that that the oil
ministers would also discuss whether to raise
OPEC's price band to where it included the $34
price that OPEC's oil basket has averaged over the
last year. He stated that he did not know whether
OPEC ministers would decide to raise the price band
at this or a subsequent meeting. He acknowledged
that it would send a mixed signal to the market if
OPEC raised both the price band and the production
quota. He argued, however, that the current price
band was unrealistic both because it did not
account for inflation and the decline in the value
of the dollar and because current prices were
averaging well above the band, despite OPEC's
efforts. For OPEC, he said it would be a matter of
credibility to have a price band that reflected
reality.


4. (C) Ismail said that he still thought the supply
and demand fundamentals were about right and that a
lot of the reasons behind the price rise were
"market fears" and "speculation." He noted that
some observers had placed a risk premium on the
price of oil of $10-$15, adding that if these
concerns could be addressed, prices should drop
down.


5. (C) Comment: Dr. Ismail's comments are likely
to reflect Oil Minister Al-Nassiri's views to
increase both the production quota and the price
band. Even if OPEC agrees to raise the production
quota, however, the Ministry of Petroleum has no
say in how much oil the UAE actually produces. The
Emirate of Abu Dhabi controls the vast majority of
UAE oil resources and production capacity, and
makes its own production decisions. We currently
estimate that the UAE is producing at or around its
maximum sustainable capacity of 2.5-2.6 mb/d.
(Note: Our production estimates track those of the
Ministry of Petroleum.) If Abu Dhabi wanted to
increase production, it would need to flare gas,
which violates environmental regulations and Abu
Dhabi policy. End Comment.
Sison