After weeks of falling crude prices, the Organization of Petroleum Exporting Countries finally agreed to an emergency meeting Oct. 19 in Qatar to discuss a possible production cut of 1 million b/d.
Analysts in the Houston office of Raymond James & Associates Inc. said the group would try to work out details of what would be its first official production cut since April 2004. Ministers had been debating whether the cut would be from actual output of about 27.5 million b/d for members other than Iraq or from the "notional" group quota of 28 million b/d.
"The results of the meeting should help shrug off the uncertainties related to the cut that have been hanging over the market in the last couple of weeks," the Raymond James analysts said.
The US Energy Information Administration (EIA) estimates the 10 OPEC members subject to quota are producing 27.6 million b/d of crude.
However, Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va., said, "OPEC (including Iraq) produced 29.8 million b/d of crude oil in September and needs to produce 29.5 million b/d in the fourth quarter of 2006 and 29 million b/d in the first quarter of 2007 to balance global supply-demand." He said, "OPEC really does not need to remove supply from the market until the first quarter. However, we think it will occur before that due to the recent crude oil price decline."
Because of the gap between OPEC's official quota and its actual production, the "only practical solution" would be a uniform 3.5% reduction for each member based on September production levels, said analysts with the Société Générale (SG) group.
"We do not think this [reduction] will have much impact on the market. At best, OPEC can expect the market to give it some short-term credit by trading in a narrow range (say $57-62/bbl) until it gets the first indications on compliance," they said.
"The oil market is indeed oversupplied (by only 500,000 b/d)," said SG analysts. But that oversupply "would have disappeared mechanically" in the fourth quarter, "even with OPEC still producing at the current level," they said. "The market has been oversupplied on average for the last 3 years without having any downward impact on the price. Therefore, strictly speaking, the market is not looking for a rebalancing of supply as it knows the bearish trend is not fueled by any physical issue but rather for the degree of OPEC's commitment to floor the price at a certain level."
Other market factors
After a steep fall earlier in the week, crude futures prices rallied Oct. 12-13 from a 10-month low, buoyed by reports of the first decline in US distillate inventories since early August. The November contract for benchmark US light, sweet crudes hit a 2006 low of $57.22/bbl in overnight electronic trading Oct. 12 on the New York Mercantile Exchange but rallied to close at $57.86/bbl. It finished the week at $58.57/bbl Oct. 13.
In the interim, safety authorities in Norway ordered production shut down at two offshore platforms operated by Statoil ASA and Royal Dutch Shell PLC, reportedly over concerns about lifeboat standards. That has reduced Norwegian production by 280,000 b/d from 2.7 million b/d of crude oil and natural gas liquids.
Crude markets also were buoyed by unseasonably cold weather in the northeastern US (OGJ Online, Oct. 12, 2006). Nonetheless, crude futures prices ended the week 2% lower Oct. 13.
US distillate fuel inventories dropped 1.6 million bbl to 149.9 million bbl during the week ended Oct. 6. Ultralow-sulfur diesel dipped by 200,000 bbl in its first decline since the week ended July 14. Heating oil fell by 1.8 million bbl, the largest decline since the week ended Mar. 24, said EIA officials.
The November natural gas contract fell 36.8¢ to $5.78/MMbtu Oct. 12 and was down to $5.66/MMbtu Oct. 13 on NYMEX as US winter gas storage increased to the highest level ever. EIA reported the injection of 62 bcf of gas during the week ended Oct. 6, boosting US storage to nearly 3.4 tcf, up by 410 bcf from year-ago levels and 358 bcf above the 5-year average.
Natural gas futures prices were higher in early trading Oct. 16 after Northeast US weather turned colder than expected. A state of emergency was declared in Buffalo, NY, where 2 ft of snow triggered power outages. The November natural gas contract fell Oct. 11-13, ending an 8-day rally and finishing the week at $5.66/MMbtu on NYMEX.
(Online Oct. 16, 2006; author's e-mail: email@example.com)