Stability awaiting? OPECs production cut worries the West.   
by Dr. Cyril Widdershoven

The question on everybodys mind this week was and still is, where will the oil price go? Is there an added negative effect on production curbs to be expected or will there be the long awaited stability in international oil markets? Until today, this has to be discussed, because the signs are contradicting themselves on a regular basis.

OPECs agreement to an aggressive five percent reduction in oil supplies, aimed at keeping crude prices afloat near $25 a barrel, was not the only statement that is rocking the oil markets these days. It additionally indicated that it would slice output again soon, especially when the targeted results wont be reached. OPEC has taken the decision despite fears among major importing nations that it could spell trouble for decelerating economies in the West by raising energy costs again.

OPEC cut 1.5 million barrels a day to cap limits for 10 members at 25.2 million from February. The United States and the EU had urged producers to make only a modest reduction. US Secretary of Energy Bill Richardson called the decision disappointing.

The European Commission expressed regret at an expected decision by OPEC to cut production, saying the cut was important and premature. The commission considers this premature & an important reduction which threatened to have negative effects, notably on the economies of consumer countries & but also on other countries, said EU spokesman Gilles Gantelet. 

But OPEC price hawks immediately started lobbying for further constraints when the group next meets in March. Secretary General Ali Rodriguez said that the group could consider curtailing output by as much as another million barrels a day in March. That will depend on where oil prices, now near the middle of the groups preferred $22-$28 range move in the coming weeks.

The UAE already stated that the decision by OPEC to cut as adequate and would not have an effect on the world economy. The decision by OPEC to cut its production by 1.5 million bpd is good and adequate given the excess of one to two million bpd on the market, Obeid bin Saif al Nasiri, UAE Minister of Petroleum and Mineral Resources, stated in Vienna afterwards. The fact of soaking up 1.5 million bpd will allow a balance between supply and demand during this year, so long as no surprises unsettle this balance in the short or medium term, Nasiri added. He said that an agreement has been adopted to reduce production, guarantee a balance on the market and put an end to the substantial fluctuation in prices of crude.

Oil dealers, who had pushed prices up sharply in anticipation of the deal, sold US crude down 64 cents to $29.95 the day before the decision. London Brent already was valuing an OPEC crude basket at less than $24 per barrel. Saudi Arabia said the next step on supply would be tailored to keep the OPEC basket near $25.

We will raise or cut production as needed to keep prices at the target said Saudi Oil Minister Ali Al Naimi. Analysts around the world said that the cutbacks, the first by OPEC in two years, underlined its determination to defend oil prices and maintain recent high export revenues. This is significant because it is the first time that OPEC has cut production to defend the new higher price level of $25 a barrel said Gary Ross of US consultancy PIRA Energy. This deal should do the trick but there are risks that the economy slides out from underneath them.

OPECs Rodriguez said producers had been determined to stem a swift decline in oil prices from a recent 10-year high of $35. Stocks are increasing and in the second quarter we saw a sharp fall in prices coming, he said. We wanted to maintain the stability of the market and of course of prices.

Last year, OPEC has been blamed for stirring inflation by moving too slowly to restore output curbs put in place after the price collapse of 1998. Inventories of crude and petroleum products slipped to record lows in 2000 and consuming nations are worried that OPECs new cutbacks will prevent stocks rebuilding. OPEC is showing that it is more determined to defend the floor of its $22-$28 target price than the ceiling said Raad Alkadiri of Washingtons Petroleum Finance Co. Analysts said deliveries in practice were likely to subside by closer to one million bpd than the 1.5 million on paper because some countries were unable to meet their previous quotas. Iraq, bound by United Nations sanctions, is not party to the agreement. Its UN-monitored exports have been running low since December, after Baghdad tired to regain control over exports revenues by demanding an unauthorized surcharge. An Iraqi official in Vienna said supplies would increase again from February. 

All in all, international markets are still bracing for unexpected fluctuations of international price levels. The pro-active approach, now taken by the OPEC members, will be a point of worry in Western capitals. A continuous high level of prices will have its effects on economic growth, inflation and unemployment levels throughout the USA, EU and the Asian Tigers. On the other hand, stable prices, which are high enough to be above production costs in the developed countries, will support the redevelopment of their own oil and gas production. Stable prices, even higher than consumer nations want, will be a better situation than constant fluctuations on which no real investment proposals can be based.  

Very large crude carriers (VLCCs) will suffer more than any other tanker sector if the cuts are really implemented. Brokers around the world already stated A cutback in OPEC oil production affects shipping rates negatively no matter how it is sliced. New York tanker broker Poten stated in a market report VLCCs are most vulnerable to production cutbacks &this decline is already in progress. More than the fundamentals, it will be the psychological impact (of the cuts) that hits rates hardest. Brokers stated that oil trading firm Glencore had fixed the 24-year oil Ocean Jewel from Nina Al-Bakr to the US Gulf at W95 although the market rate was slightly higher at W97. This represents a 10 point drop from January 2 when the 2001 World-scale rates were announced. VLCCs from the Arabian Gulf to Japan are now asking W112, 16 points down on the January 2 rate. Million barrel ships will feel the pinch less, brokers sated, because any reductions in liftings from their traditional stronghold in West Africa should be offset by renewed liftings out of Ceyhan. So far this year, million barrel rates have fallen steadily in the Med, but have risen steadily out of West Africa, standing around W207 yesterday. 

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