A month in effect, an elaborately coordinated curtailment of oil production remains-what else?-a muddle.
But it worked. Two months ago, there were fearful warnings of $10/bbl crude oil about now. Last week, the New York Mercantile Exchange futures contract for light sweet crude traded at $19-20/bbl.
Did this result mainly from promised production cuts or from the simple existence of the promise? Important to the answer will be January production reports due soon for the relevant exporters.
Unusual step
Last November, the Organization of Petroleum Exporting Countries took an unusual step. Having reduced output quotas three times during 2001 without arresting a steep price slide, the group made its fourth reduction contingent on extramural help. That fourth move, effective Jan. 1, brought OPEC's total cuts since the start of 2001 to 5 million b/d and reduced the group quota for members other than Iraq to 22.7 million b/d.
From nonmember exporters, especially Russia, the group sought collective sacrifice of 500,000 b/d. It settled for agreements totaling 462,500 b/d from Russia, Norway, Mexico, Oman, and Angola.
The agreement was ambiguous but stabilized crude prices anyway. The market recognizes that coordination of crude production is always messy.
The physical process itself is cumbersome and resistant to systematic control. And individual exporters ultimately base production decisions on economic interests. They don't for very long sacrifice those interests to the group politics essential to coordination of supply.
Against those difficulties, OPEC's effort to broaden supply management so much was ambitious. And its appeal was uncharacteristically aggressive. The group said it wouldn't cut quotas unless nonmembers shared the pain. And it said prices would collapse if it didn't happen. Among oil producers, fear of price collapse is a strong force of unification-maybe the only one.
The question of the moment is whether OPEC's unofficial production collaborators are really trimming supply or merely talking about it. Preliminary production numbers for the agreement's first month had not appeared at this writing. It is clear, however, that circumstances and tendencies differ as much among the collaborating exporters as they do among OPEC members.
Russia, points out a January report by the US Energy Information Administration, agreed to reduce crude shipments rather than production, cutting exports through the Transneft pipeline by 150,000 b/d from third-quarter levels. But the decline might have happened anyway. Total Russian exports dropped by more than the agreed amount in the first quarters of 2000 and 2001 because of increased internal consumption for heating. The real test for Russia comes in the second quarter, when exports seasonally increase.
Norway also agreed to limit output by 150,000 b/d, but EIA expects the decline from fourth-quarter 2001 production to be only 60,000 b/d. The country has trimmed output in parallel with OPEC moves before-but always when it had maintenance to perform or could delay field start-ups. The first quarter is too early for North Sea maintenance, and there is only one Norwegian field due on stream on the first quarter.
EIA expects Mexico to meet its commitment to cut crude shipments by 100,000 b/d from what it had planned. But Mexican production is to rise by more than 50,000 b/d during the first quarter.
Oman agreed to trim production by 40,000 b/d but didn't specify a base level or duration. The country has in the past made similar commitments that had no apparent effect on production.
Like Oman's, Angola's cut-back pledge of 22,500 b/d doesn't have a basis for calculation. EIA notes reports of the country's having cancelled two February cargos. But production is rising from Girassol field, which went on stream in December.
Market response
Stabilization of crude prices indicates that the market liked OPEC's late-2001 quota adjustment and the coerced support of nonmember exporters. And prices in the $19-20/bbl range no doubt reflect doubt that parties to the agreement will deliver all or even nearly all the cuts they promised. The potential for disappointment remains high. But the potential also grows that, before production numbers settle out, signs will emerge of a demand recovery able to make the production agreement obsolete.
Amid the oil market's many hazards, muddle is by no means the worst.
