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'De facto' cut in OPEC output noted

Sam Fletcher
Senior Writer

Energy prices retreated slightly but remained above $67/bbl Apr. 7 after Edmund Daukoru, president of the Organization of Petroleum Exporting Countries, said his group is unlikely to cut production in the face of high prices and geopolitical threats to crude supplies.

However, OPEC already has made a "de facto" production cut of nearly 1 million b/d over the past several months, said J. Marshall Adkins in the Houston office of Raymond James & Associates Inc. "The sharpest reductions have come from four of the organization's most unstable countries: Nigeria, Iraq, Venezuela, and Iran. With rebels in Nigeria and Iraq stating their desire to continue disrupting oil production, coupled with Venezuela's and Iran's political missteps, it is now apparent that ongoing geopolitical issues will continue to weigh on oil supply throughout 2006 and 2007. As such, we are no longer concerned that large, counterseasonal petroleum inventory builds will lead to near-term weakness in oil prices," Adkins said.

April began with oil prices on the rise as Iran conducted war games in the Persian Gulf, while the Venezuelan government proceeded with efforts to take control of Venezuela's oil and gas assets. Iranian officials are again talking of possible reductions of crude production if the United Nations Security Council imposes trade restraints against Iran for its nuclear program.

Meanwhile, having failed in an earlier pledge to bring shut-in production back on stream within a few weeks, Nigerian government officials now say output may resume in another month. Some 630,000 b/d, or 26% of Nigeria's normal crude production, has been shut in because of sabotage of oil industry facilities and kidnappings of workers in the Niger Delta.

Raymond James expects geopolitical risks to energy markets to remain high over the next 12-18 months.

"Various international supply disruptions (especially in Iraq and Nigeria), coupled with escalating geopolitical risk (especially involving Iran), are likely to keep oil prices at notably elevated levels at least through 2007. In fact, recent data suggest that the oil market now appears substantially more balanced than it did just a few months ago," Adkins said. As a result, Raymond James on Apr. 10 raised its 2006 crude price forecast to $65.50/bbl from $59.38/bbl previously and its 2007 price prediction to $70/bbl from $62/bbl.

'New paradigm'
"We believe that the oil markets have entered a new paradigm where chronically low excess OPEC production capacity will likely lead to increased price volatility, along with generally higher average prices," said Adkins. "Production from such OPEC members as Venezuela and Indonesia already appears to be in permanent decline. Non-OPEC supply continues to face an uphill battle, with most mature producing regions in decline and dramatically decreasing growth rates in Russia over the past year."

As rising demand in China and India outpaced non-OPEC supply increases, the additional call on OPEC production "has left the world with an extremely low level of excess production capacity," Adkins said. "In fact, OPEC's excess capacity is the lowest in 3 decades."

He said, "Like the natural gas markets in the mid-1990s, the oil market finally appears to have worked off its supply 'bubble' to the point where oil prices have moved to a higher sustainable level for the long run."

Hurricane outlook
Meanwhile, Colorado State University meteorologists recently updated their 2006 hurricane forecast, calling for a "very active" Atlantic hurricane season this summer, with 17 named storms, up from an average of 9.6 storms/year. Of those 17 named storms, 9 are expected to develop into hurricanes, up from an average 5.9, with 5 of those being "intense," vs. an annual average of 2.3. The probability of at least one major hurricane making landfall in the US is 81%, up from an average 52%, with a 47% probability that it will hit the Gulf of Mexico.

In its latest update of Gulf Coast damage from Hurricanes Katrina and Rita, the Minerals Management Service said 87 platforms on federal leases in the gulf were still idle as of Apr. 5. Officials reported 340,438 b/d, or 22.7%, of crude production from federal leases in the gulf are still shut in, as are 1.4 bcfd , or 13.6%, of natural gas production. Production lost Aug. 26-Apr. 5 from federal leases in the gulf totaled 144.2 million bbl of crude and 711.6 bcf of gas. That's equivalent to 26.3% of the crude and 19.5% of the natural gas produced annually from federal waters of the Gulf of Mexico.

(Online Apr. 10, 2006; author's e-mail:

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