Week of Jan. 12 turning point for oil markets

The week of Jan. 12 could prove to be a crucial turning point in world oil markets for 2003—and perhaps for a long time to come.

In an extraordinary special meeting Jan. 12, ministers of the Organization of Petroleum Exporting Countries agreed to boost production quotas by 1.5 million b/d to 24.5 million b/d. The move was intended to relieve some of the mounting pressure on global oil supply caused by the loss of Venezuelan exports and the growing likelihood of an interruption in Iraqi oil exports.

Although OPEC's price band trigger—which takes effect when the price of the OPEC basket of crudes exceeds $28/bbl for more than 20 trading days—had been tripped, OPEC's rules in that regard call for an automatic increase of only 500,000 b/d in production when that occurs. And OPEC has moved sluggishly in the past when that has occurred.

In any event, the Jan. 12 production quota increase merely enables OPEC (excluding Iraq) to roughly match its collective quota with its actual level of production—about 24.2 million b/d. Moreover, the new quota includes an increase of 173,000 b/d to 2.8 million b/d for Venezuela—a laughable prospect no matter which estimate of current production coming out of Caracas one finds credible. The latest estimates from the feuding factions are 890,000 b/d, pro-Ch

Nevertheless, the quota move gives OPEC the latitude to put more supply onto the market without risking its credibility over claims of quota "cheating."

The real intent of the quota hike was to send a clear signal to oil markets that OPEC is serious about avoiding severe price shocks in the event of the simultaneous loss of Iraqi and Venezuelan exports.

Oil prices remained doggedly high after the OPEC quota accord, however, in light of concerns over the lag time between an output increase and when added Persian Gulf supplies reach market and the lag time in restoring full Venezuelan production. Even Mexico's pledge to increase output failed to keep oil prices from hitting a 2-year high briefly on Jan. 17.

Iraq heats up

Meanwhile, the situation with Iraq got hotter the week of Jan. 12, with the discovery of chemical weapons missile warheads by arms inspectors in Iraq, a toughly worded warning to Iraq from President George W. Bush, and Saddam Hussein dropping his guise of accommodation in favor of saber-rattling.

Press reports suggested that the discovery may have been effected through the inspectors' use of US intelligence; if so, count on more such discoveries as the Bush administration seeks to ensure the inspectors don't overlook the "smoking gun" it needs to disarm Saddam.

Saddam's revived truculence might signal a premature loss of Iraqi oil supplies ahead of any US-led invastion. His disgruntlement over arms inspection tactics in the past have led him to halt oil sales under the United Nations' oil-for-aid program. Such moves actually earn him more money, as the supply disruption boosts oil prices while hiking demand for his smuggled volumes. Could Saddam try it again to build a nest egg for a (hoped-for) life in exile?

Saudi role

The most startling news of the week came, however, when Time magazine reported that Saudi Arabia was orchestrating efforts to effect a coup against Saddam Hussein.

The idea is to encourage Iraqi generals to overthrow Saddam and his ruling clique in exchange for a UN amnesty, Time reported. The rationale is that the Saudis now accept the certainty of a US-led attack on Iraq and fear that a post-Saddam Iraq would erupt into chaos that could spill over into the rest of the region.

If these reports prove true, it could signal a fundamental shift in the geopolitical dynamics of the region. It may suggest that the moderate Arab nations, led by Saudi Arabia, are no longer willing to play both ends against the middle in the Middle East conflicts. That they prize stability above all else and are willing to take risks in pursuit of that stability. That they aren't going to be neutral when it comes to terrorists or terrorist regimes.

Certainly, there are pragmatic reasons for such a shift: the moderate regimes' own survival and preservation of their oil market shares.

But the bottom line is that the Saudi-led moves against Saddam and on oil production not only could prevent war and oil price shocks, they also augur well for future oil market stability and, in the long term, moderate oil prices.

OGJ Hotline Market Pulse
Latest Prices as of Jan. 17, 2003

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Nymex heating oil

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NOTE: Because of holidays, lack of data availability, or rescheduling of chart publication, prices shown may not always reflect the immediate preceding 5 days.

*Futures price, next month delivery. #Spot price. @New contract

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