Production cuts affirmed at OPEC meeting

OPEC, Non-OPEC Production Pledges [55,746 bytes]

The Organization of Petroleum Exporting Countries has agreed to cut total oil production by 1.7 million b/d beginning Apr. 1 and continuing for 1 year. Non-OPEC producers followed the OPEC agreement with a pledge by the governments of Mexico, Norway, Oman, and Russia to contribute combined cuts of 400,000 b/d.

The latest pledges are in addition to a 2.6 million b/d ground-breaking production cut agreement between OPEC and some non-OPEC producers in June 1998 (OGJ, June 29, 1998, p. 28). The new agreement takes to about 5 million b/d the total production cutbacks promised by OPEC and non-OPEC producing countries.

In all, OPEC and non-OPEC producers agreed last week to reduce output by 2.104 million b/d. The new output levels promised by OPEC members, and the additional cuts pledged by non-OPEC producers, are shown in the table on p. 19. On the eve of the OPEC meeting in Vienna Mar. 23, Brent crude oil for May delivery closed in London at $13.88/bbl. After the meeting, the benchmark blend again closed at $13.88, showing that traders had already factored the anticipated cutbacks deal into their pricing.

Compliance questions

By noon in London on Mar. 24, the price of May Brent had risen slightly to $13.90/bbl, with markets generally optimistic that compliance with the latest agreement would be at least as high as with last June's deal.

Tim Whittaker, senior analyst at the London office of Commerzbank AG, told OGJ that the biggest issue now is whether OPEC members would comply with the agreement, once the initial wave of enthusiasm has died away.

Whittaker added that the cutbacks have effectively shut in 4 million b/d of oil producing capacity worldwide, and that this situation is not sustainable beyond the near term.

"A 75% compliance is a reasonable expectation for the new agreement," said Whittaker. "It's about what we've seen from OPEC so far.

OPEC optimism

Following the Vienna meeting, OPEC ministers seemed hopeful that the agreement would restore order to global oil markets, although Saudi Arabia's Ali I. Naimi warned that his country would no longer play the role of swing producer.

In his opening address to the OPEC meeting, OPEC Pres. Youcef Yousfi, Minister of Energy and Mines for Algeria, said, "OPEC members have demonstrated political will and strong determination to fully abide by (the agreement's) conditions. This strength of commitment, coupled with the spirit of solidarity that prevailed throughout our lengthy negotiations, gives me reason to believe that we will soon see stability returning to the market, with prices rebounding to acceptable levels."

Asked about potential compliance with the agreement, OPEC Sec. Gen. Rilwanu Lukman, too, said this would be ensured by the "sheer determination" of OPEC to boost prices.

On the issue of whether a price rise would encourage the return of shut-in non-OPEC oil to the market, Lukman said the cuts would be sufficiently large to enable the reabsoption of such shut-in production into the market.

Venezuelan Energy and Mines Minister Al$#237; Rodr$#237;guez said Venezuela is "highly satisfied" with the cutback agreement. He said that OPEC should learn from its past and, concurrently with the production cuts, it should follow up on market developments to prevent prices from rising too high and leading to excess supplies coming onto the market (OGJ, Mar. 22, 1999, p. 32).