OPEC micromanagement bullish for oil prices

June 23, 2003
The June 11 Doha meeting of the Organization of Petroleum Exporting Countries yielded the strongest middle-to-longer-term evidence supporting a bullish oil price outlook yet this year.

The June 11 Doha meeting of the Organization of Petroleum Exporting Countries yielded the strongest middle-to-longer-term evidence supporting a bullish oil price outlook yet this year.

No, it wasn't the simple reaffirmation of maintaining existing production quotas, which was a widely predicted result. Equally predictable was the group's call for improved quota compliance, which is really tantamount to recognizing Saudi Arabia's limited tolerance for other members taking advantage of its role as the real swing supplier for oil markets.

The clincher for longer-term support of a $25/bbl oil price (OPEC basket) was the assembled ministers agreeing to schedule another "extraordinary" meeting scarcely 6 weeks from now. What this demonstrates is OPEC's willingness to truly micromanage oil supplies, given the volatility not only of oil prices but also global geopolitics. OPEC traditionally has hewed to the notion of holding two regular meetings each year. The group would hold extraordinary meetings only when a price crisis (usually a fall) was imminent. Now such meetings are hardly extraordinary, as we've seen already this year. To actually schedule it makes an "OPEC extraordinary meeting" an oxymoron.

Case for micromanaging

There is a strong case for micromanaging oil markets this year. Contrary to the predictions of some who held that OPEC must cut production to avert a second-half price collapse, there is every reason now to believe that the market may need all the OPEC crude it can get for the rest of the year.

The chief unknown is the status of Iraqi oil supplies. Most observers were understandably skeptical about claims by recently installed Iraqi oil officials that Iraq's production would return to 2.5 million b/d in a matter of weeks. The widely held presumption has been that such a level could not be achieved for several months. Now even that may be in question.

The 9 million bbl of Iraqi oil stored at Ceyhan may soon reach the market, but that is a relative drop in the bucket. Especially troubling are reports of an explosion and fire on the pipeline linking Kirkuk and the Ceyhan terminal; if sabotage is proven to be the cause, that would suggest a concerted effort to cripple Iraq's oil infrastructure at its most critical point—exports.

The looting and furtive sabotage of Iraqi oil fields have already taken its toll on restoring output, and now some Iraqi officials are worrying about resulting long-term damage to stalwarts such as Kirkuk and Rumaila fields. A picture is beginning to emerge of organized attempts by ousted Baathists and other sympathizers with the regime of deposed President Saddam Hussein to derail Iraq's recovery (and with it undermine the US-led occupation). The effectiveness of the US military campaign to corral these miscreants remains to be seen.

There are other global oil supply concerns. The newest centers on civil strife bubbling up in Ecuador. At presstime, Ecuador's government had called in the army to protect oil facilities from disgruntled striking oil workers. At last report, the country's principal export pipeline, SOTE, was running at 50% of capacity because of the strike.

Recovery of Nigeria's crude oil production is still in question, as the postelection status quo has done little to dispel fears of more strife in that country's main producing region.

Meanwhile, the recent truculence shown by the administration of Venezuelan President Hugo Chávez toward the opposition—despite their agreement to allow the mid-August recall referendum to proceed—does not augur well for avoiding a repeat of this year's unrest in that country.

Unrest is growing as well in Iran, underscored by the startling sight of thousands of young Iranians calling for the ouster of President Khatami, a moderate they see as ineffective in implementing reforms against an entrenched theocracy. Furthermore, irked by what it sees as Iranian meddling in Iraq and citing a troubling United Nations report about Iranian nuclear arms ambitions, the US seems to be moving into a more confrontational stance with Tehran.

Market balances

On the demand side, expectations of recovery persist.

The International Energy Agency, in its June market report, held to its projection of 1 million b/d demand growth in 2003—with the bulk of that coming in the second half.

IEA sees demand growing by 1.8 million b/d in the third quarter and another 1.9 million b/d in the fourth. And stocks remain well below normal levels.

OPEC may wish to consider monthly meetings.

(Online June 13, 2003; author's e-mail: [email protected])