MARKET WATCH
Oil prices mixed at end of November

Sam Fletcher
Senior Writer

HOUSTON, Dec. 1 -- Oil futures prices dipped Friday on the International Petroleum Exchange in London, while the average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes inched up.

Brokers claimed oil prices are likely to be volatile ahead of the scheduled meeting next Thursday of OPEC ministers in Vienna because the market can't yet rule out another cut in the group's production quotas, similar to the surprise decision at the September meeting to reduce total production by 900,000 b/d effective Nov. 1.

However, Obaid bin Saif Al-Nasseri, UAE minister of petroleum and mineral resources, said this week there is no need for OPEC to change its current production quota. "Oil supplies are seemingly stable and global stocks are close to their last-year levels or perhaps higher," he said, despite recent "startling fluctuations" in oil prices.

"We are optimistic about next year's prices, despite expectations of a possible decline in seasonal demand," said Al-Nasseri. Still, he said, OPEC ministers may vote this week for an extraordinary meeting in January or February to review market conditions.

Faith in OPEC
Frederick P. Leuffer and Nicole L. Decker, analysts with Bear, Stearns & Co. Inc., New York, agreed that the recent rally in oil prices has nothing to do with market fundamentals. "Rather, we believe oil prices reflect a premium for terrorism and a view that OPEC will succeed in holding oil prices within its targeted band [of $22-28/bbl]," they said in a Nov. 25 report.

"Some oil traders are banking on production cutbacks by OPEC to sop up excess supply. They reason that somehow OPEC has been successful in keeping oil prices in a determined price band, and the organization says it will continue to do so," the analysts reported. "There are signs that some members have cut production in November in accordance with lower output quotas. Saudi Arabia and the UAE informed European and US customers that supplies would be curtailed. . .. Also, Saudi oil tanker activity has slowed."

However, they said, "It remains to be seen how long oil traders will ignore fundamentals in anticipation of a major cutback in OPEC production. We see a potentially large buildup of supplies next year from non-OPEC producers and further restoration of supply outages from Iraq, Nigeria, and Venezuela. This could require other OPEC producers to cut production by as much as 4.2 million b/d—a task too great for OPEC alone. We doubt that non-OPEC producers will voluntarily cut production unless oil prices fall to the low $20s."

Price premium for terrorism
Meanwhile, said Bear, Sterns analysts, "After a series of attacks on oil pipeline facilities in Iraq, truck-bomb explosions in Turkey and Saudi Arabia, and new terrorist threats believed to have come from Saddam Hussein and Osama bin Ladan, we believe a terrorist premium is reflected in oil prices. Hardly a day goes by that we are not asked: 'If terrorists can attack oil pipelines in Iraq with such a large US military presence, why can't they attack oil installations in Saudi Arabia?'"

They said, "It is difficult to quantify the 'faith in OPEC premium' vs. the 'terrorist premium' in oil prices. We believe that based on fundamentals alone, oil prices should be in the $22-24/bbl range today—the same price level as early 1997—given that the growth in oil inventories has kept pace with the growth in oil demand during the past 6 years. With oil near $30/bbl, our sense is that the terrorist premium represents about $2/bbl, or 8-10%, with $4-6/bbl attributable to expectations that OPEC will cut output."

Price surge
"The surge in oil prices in the past 2 months is unlike anything we have seen before. Oil prices advanced from an already high level by as much as $7/bbl between Sept. 19 and Nov. 19, rising above $33/bbl despite restoration of supply outages, blatant OPEC quota violations, and a significant build in crude oil inventories," they reported.

"Oil fundamentals are weak," they said. "We estimate that demand has increased by only 1.5% in the first 9 months of 2003, even though consumption was boosted by fuel-switching from natural gas in the US and from nuclear in Japan and by colder-than-normal temperatures in the first quarter." As a result, Bear, Stearns has reduced its 2003 forecast for growth in oil consumption to 1.4%, from more than 2% previously.

"Meanwhile, oil supplies continue to rise. More than 18 non-OPEC countries have registered gains in oil production this year, including Russia, Kazakhstan, Canada, Mexico, Brazil, China, Angola, Gabon, South Africa, Malaysia, Brunei, Ecuador, Yemen, and Egypt. Non-OPEC supply is expected to grow by more than 1 million b/d this year," they said. They estimated non-OPEC production increased by 500,000 b/d during the third quarter and is up by 1.6 million b/d from the same period a year ago.

OPEC production also increased by more than 1.2 million b/d between June and October, "despite the organization's call for output restraint, largely due to higher output from Iraq," they said

"In fact, most 'barrel counters' agree that OPEC production has increased each month since June," the analysts said. "All [active] OPEC members, except for Indonesia and Venezuela, continue to cheat on production quotas."

Moreover, US inventories of crude "have soared by 39.9 million bbl in the past 17 weeks," they said. "The increase in inventories represents much more than a seasonal build—this is the largest build we have seen over this duration since 1987. Since mid-September when oil prices began their climb, US oil inventories have increased by 22.8 million bbl." Bear, Sterns reported similar inventory builds among other members of the Organization for Economic Cooperation and Development.

"Yet oil prices rose sharply between mid-September and mid-November, despite rising inventories," said Leuffer and Decker. "The only times that the historical relationship between oil inventories and oil prices have been broken was when oil prices advanced from extremely depressed levels in response to signals from OPEC that it would significantly cut production, such as in 1987 and 1989. In these cases, the oil market responded to production cuts as traders anticipated (wrongly in 1987 and rightly in 1989) that inventories would eventually decline."

Energy futures prices
The January contract for North Sea Brent oil lost 25¢ to $28.45/bbl Friday on the IPE in London. Gas oil for December delivery was down by $2.25 to $251/tonne, and the January natural gas contract dipped by 3.5¢ to the equivalent of $5.94/Mcf on IPE.

The New York Mercantile Exchange was closed Nov. 27-28 for the US Thanksgiving holiday.

The average price for OPEC's basket of seven crudes inched up by 6¢ to $28.45/bbl Friday. For last week as a whole, however, the basket price averaged $28.47/bbl, down by 89¢ from the previous week.

So far this year, OPEC's basket price has averaged $27.95/bbl, up from an average price of $24.36/bbl for all of 2002.

Contact Sam Fletcher at Samf@ogjonline.com.

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