Kuwait’s Excess Oil Output Worrying Others in OPEC

A power play by Kuwait, a key OPEC member producing above its assigned output quota, risks sparking a slide in oil prices, a source close to the Organization of Petroleum Exporting Countries said.

According to the source, several members of the 13-nation group “are now very concerned” about excess output by Kuwait and other members.

Their concern may result in informal talks among some oil ministers who will be part of their countries’ delegations to a nonaligned summit in Belgrade, Yugoslavia, next week.

Such talks would examine possible solutions to put before an OPEC meeting in Geneva on Sept. 23 about the problem posed by Kuwait demands and also the United Arab Emirates for higher sales quotas than the rest of OPEC is willing to assign them.

When the cartel last met in June, a majority would not accept an assessment by Kuwait’s minister, Sheik Ali al Khalifa al Sabah, that firm world demand for oil could easily absorb at least 21 million barrels per day pumped by OPEC without a serious threat to prices.

Cartel Ignored

Sheik Ali wanted individual quotas for Kuwait and the UAE to be at least a third bigger than the approximately 1 million barrels a day that the others assigned to each. The majority set OPEC’s overall ceiling at 19.5 million barrels daily.

Since then, in an “I-told-you-so” show of muscle, Kuwait, with the UAE matching it, has simply ignored the rest of the cartel and produced as much as 1.8 million barrels a day.

With other smaller violations, this put OPEC’s total output at about 21.5 million barrels daily in July and August.

As Kuwait’s Sheik Ali had predicted, the market absorbed it all without a price crash. The world average spot crude oil price has shed about $2 per barrel but still holds above $16. It fell toward $10 during a glut last fall.

West Texas Intermediate, the main U.S. grade of oil, closed Wednesday on the New York Mercantile Exchange at $18.83 a barrel after having closed unchanged Tuesday.

Some industry executives, however, say prices have been stable recently because traders are cautious in case the coming OPEC talks in Geneva yield tough measures to choke supply. That implies the risk of a price slide if OPEC disarray persists.

The real strength of demand is the big uncertainty.

Mediating Panel

According to Michael Rothman, senior energy analyst with Merrill Lynch Capital Markets, there is no sign that excess OPEC oil is swelling stocks to dangerously high levels.

He believes that the explanation may be a time lag in delivery and that a supply overhang will soon build up that could push prices down about $2 a barrel or more.

But Rothman says another possibility is that demand is stronger than has been thought.

OPEC sources say such uncertainties are another reason cartel President Rilwanu Lukman of Nigeria would like an informal talk before the Geneva meeting, perhaps in Belgrade, with the ministers of Algeria, Indonesia and Venezuela.

Along with OPEC Secretary General Subroto of Indonesia, these officials form a mediating panel within OPEC.

The Geneva talks will officially consist only of a monitoring committee of eight of the 13 ministers, but others may sit in and could convene a full conference to seek a lasting quota accord.

Doubts persist, however, about whether Saudi Arabia, Iraq and Iran will drop their insistence on making any quota increases proportionate to current quotas.

Even with a ceiling as high as 21.5 million barrels a day, Kuwaiti and UAE demands could not be met without giving them preferential treatment.

Kuwait’s Power an Issue

OPEC sources say reasons of prestige may explain the Kuwaiti attitude. The Kuwaitis have noted that Iraq won a big quota increase last year after it boycotted OPEC output-sharing pacts.

Kuwaiti relations with Saudi Arabia may also be strained.

“Saudi-Kuwaiti relations have probably sunk to an all-time low following Kuwait’s overproduction and the arrest of many Kuwaiti nationals accused of carrying out the bomb explosions during the recent Haj (Islamic pilgrimage),” said Mehdi Varzi, an analyst with the London investment firm Kleinwort Benson.

Non-Arab OPEC delegates say they think that, in the circumstances, Kuwait may relish the oil power it now wields.

It is in effect the world “swing” producer, dictating prices, because if a slide went too far, Kuwait’s oil minister could probably halt it by cutting output.