Crude oil price rises as OPEC pledges cuts

David Knott
Senior Editor

A new pledge by the Organization of Petroleum Exporting Countries (OPEC) and a number of non-OPEC producers to reduce global oil production by more than 2 million b/d has buoyed crude oil prices.

At close of London trading on Mar. 16, Brent crude for May delivery stood at $12.77/bbl, while dated Brent had reached $12.49/ bbl, a relatively steady rise of roughly 85¢/bbl for both benchmark contracts over the week. The rise was a direct result of discussions between OPEC and non-OPEC producers, which were intended to achieve a consensus for further cutbacks ahead of the OPEC ministerial meeting in Vienna on Mar. 23.

Key to the growing optimism was last week's agreement between Saudi Arabia and Iran that Iran would be required to make any further cuts from a baseline of 3.623 million b/d. This is the figure from which Iran was supposed to have made cuts of 305,000 b/d under OPEC's agreement of June 1998, but which Tehran has disputed and ignored (OGJ, June 29, 1998, p. 28).

The June 1998 agreement to cut OPEC production by a total 2.6 million b/d was backed by promises from non-OPEC producers-notably Mexico, Russia, Norway, and Oman-to cut a combined 500,000 million b/d.

The new accord

During Mar. 11-12, the oil ministers of Algeria, Iran, Mexico, Saudi Arabia, and Venezuela met in Amsterdam and, in consultation with other producers, pledged:

That, beginning Apr. 1, OPEC and non-OPEC producers would reduce output by more than 2 million b/d, in addition to cuts promised in June 1998.
To endorse the new proposal that is anticipated to be formalized by the OPEC ministers on Mar. 23.
That, as part of the agreement, Mexico would cut its oil production further.

Middle East Economic Survey (MEES) said: "There is no question that Saudi Arabia, the major OPEC producer, is putting its full weight behind the proposed agreement.

"It is expected that Saudi Arabia will reduce production by around 550,000 b/d, meaning that production will fall well below the present level of approximately 8 million b/d for the first time since the end of the Gulf War in 1991."

Following the agreement in Amsterdam, Norway's Minister of Petroleum and Energy, Marit Arnstad, announced that the country would cut output by a further 100,000 b/d, having reduced production by 100,000 b/d last year.

An official at the Oslo ministry confirmed that Norway would make the additional cuts on condition that OPEC formally adopts the 2 million b/d-plus reduction negotiated by the five producers in Amsterdam.

While the cuts to be made by individual producers were not announced in Amsterdam, pending further negotiations, reports in Kuwaiti newspapers claimed that Kuwait, U.A.E., Vene- zuela, Mexico, and Norway would each reduce output by at least 100,000 b/d, while Oman would also pledge cuts.

Doubt cast

Despite the market's reaction to the latest producer agreement, the potential credibility of any new cutbacks deal was tarnished by the most recent MEES estimates of OPEC production, which revealed that OPEC's output climbed still further in February, in spite of the earlier pledge.

MEES reported that combined output for OPEC rose to 27.98 million b/d in February from an average 27.65 million b/d in January, further reducing compliance with the June 1998 agreement to 65% from January's 74%.

The main production hike for February came from Iran, which boosted its output by 246,000 b/d (see table, p. 34). Given this further evidence of OPEC's inability to adhere to production limits, reaching a binding agreement in Vienna is being viewed as a difficult task.

MEES said its soundings indicated that a reasonable compliance with the 2 million b/d cutback target should be sufficient to restore prices to an acceptable level: "However, having now raised the expectations of the market regarding further production cuts, OPEC simply cannot afford to fail to deliver a credible agreement at the Vienna meeting."

Julian Lee, oil analyst at London's Centre for Global Energy Studies, said that the agreement in Amsterdam suggested that OPEC was likely to hammer out a deal, though it was difficult to predict which country would cut what.

"The communiqu? said that the parties would cut more than 2 million b/d," said Lee, "but I'm not sure where they will get this total from.

"Venezuela has been pushing for all OPEC members to cut output by 15% and to make further adjustments on a pro rata basis. However, this would require Saudi Arabia to cut production by 800,000 b/d, and I don't see the Saudis doing this.

"Having said that, the deal is definitely a step in the right direction."

Lee said that, while putting the Iranian baseline issue behind them was key to the Saudi-led breakthrough, the industry's high crude oil stocks would still mean that it will take a while for any OPEC agreement to have a notable effect.

"It may be not much before yearend before there is a significant effect on crude prices," said Lee. "This could make it politically difficult for some countries, particularly the new governments in Nigeria and Venezuela, to sell a cutbacks agreement at home.

"Short-term oil prices will be very dependent on what happens in Vienna. The markets reacted positively to Amsterdam agreement, so the pressure is now on OPEC to close a deal.

"If OPEC fails to reach the anticipated agreement, crude oil prices will be affected adversely; while, if there is an agreement as promised, there will not be much change, as the cutbacks have already been factored into the price."