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OPEC holds pat on production

Sam Fletcher
Senior Writer

As was generally expected, the Organization of Petroleum Exporting Countries agreed Dec. 5 not to raise crude production since commercial oil inventories remained at comfortable levels.

Energy prices fell Dec. 4-5 before rebounding above $90/bbl Dec. 6, then dropping below $89/bbl Dec. 7. OPEC officials blamed the volatility on "the perception of market tightness…exacerbated by nonfundamental factors, including the heavy influx of financial funds into commodities and speculative activity in the markets."

OPEC assigned production allocations of 1.9 million b/d to new member Angola and 520,000 b/d to Ecuador, which recently rejoined OPEC. For the 12 members with official quotas, OPEC production allocations totaled 29.67 million b/d; Iraq, the only member not bound by a quota, is struggling to regain prewar production levels.

In Paris, the International Energy Agency said OPEC's inaction "may do little to calm market anxiety." However, IEA said OPEC's actual production has been "much higher" than indicated at its September meeting when it raised production 500,000 b/d effective Nov. 1. Much of the additional supply comes from Iraq and Angola. "And there are signs that more OPEC oil may be on its way in December," said IEA officials. "Our concern is that there are uncertainties that surround the sustainability of some of that supply, and winter demand is as variable as the weather. The market is clearly uncomfortable that it has lost some stock cover in recent months and with prices near $90/bbl it is telling producers it wants to see that flexibility restored."

The OPEC meeting was "largely ignored" as the market focused on the strength of the US dollar, said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "The dollar index gained close to 1% [on Dec. 5] and is now back to the levels of early November," he said. "With no clear signs from oil fundamentals, the dollar index should be a key directional input."

The only reason for OPEC to increase production would be a rising momentum in energy prices, said Paul Horsnell at Barclays Capital Inc., London. Besides, the previous OPEC hike "is yet to come through, with that delayed increase having been even further delayed by heavy UAE maintenance [of wells] in November," he said.

The 'Iranium' issue
A Dec. 3 government report said US intelligence agencies now agreed Iran stopped its nuclear weapon program in 2003 and hasn't revived it. That should reduce some of the "Iranium" risk premium in energy prices, Jakob said. "Nigeria remains a volatile environment, but we could see militants in the Bayelsa state signing a new ceasefire agreement," he said.

However, Horsnell said, "The latest US National Intelligence Estimate on Iranian nuclear intentions and capabilities muddies the waters fairly significantly." He said, "The emphasis has gone from Iran being considered likely to build a weapon, to Iran having the material to make a weapon. Different in content, but perhaps not so different in policy implications. The more significant impact of the NIE is in the likely weakening of the chances of further [United Nations] Security Council action, with both Russia and China more likely to decouple from the process."

US inventories
The Energy Information Administration reported benchmark US crude inventories fell 8 million bbl to 305.2 million bbl in the week ended Nov. 30. Gasoline stocks jumped 4 million bbl to 200.6 million bbl in the same period. Distillate fuel inventories increased 1.4 million bbl to 132.3 million bbl. "The crude oil stock draw was much larger than any expectations but part of it is probably due to fog delays on the Houston Ship Channel," Jakob said. Imports of crude into the US fell 980,000 b/d to 9.4 million b/d during that week.

A Nov. 28 explosion and fire that killed two workers and temporarily shut down Houston-based Enbridge Energy Partners LP's main pipeline system carrying 1.5 million b/d crude—15% of total US oil imports—from Canada to Midwest refineries had "absolutely nothing to do" with the drop in US imports, "particularly into the Gulf Coast," Horsnell said. "US crude inventories have now fallen by just short of 50 million bbl over the past 5 months, and are now at their lowest level since September 2005."

Horsnell said, "The rise in distillate inventories follows seasonal norms and is made up of a large fall in heating oil and a larger rise in diesel." He said, "The bearish element is the larger-than-normal build in gasoline, bringing them back close to their 5-year average."

(Online Dec. 10, 2007; author's e-mail: samf@ogjonline.com)


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