Oil price climb continues after OPEC agreement

Oil prices have continued to climb following the production-cutting deal by the Organization of Petroleum Exporting Countries (OPEC) and certain key non-OPEC exporters.

Yet a price rise of more than $4/bbl in the past month appears to be based more on anticipation that the promised cuts will appear than on experience of past OPEC performance, although there is growing evidence of a recent hike in oil demand.

At close of trading in London on Mar. 29, dated Brent crude was priced at $14.46/bbl while Brent crude for May delivery was $14.56/bbl, rising to $14.81 May 30. During the week since the OPEC meeting, the gap between prompt and May prices shrank.

In the U.S., prices continued their upward march at midweek. On Mar. 31, light, sweet crude on the New York Mercantile Exchange closed at $16.80/ bbl, up 36¢ on the day and more than $1.50 on the week.

Market direction

Leo Drollas, chief economist at London's Centre for Global Energy Studies (CGES), said the market is approaching a state of backwardation, and it appeared as if traders are desperate to buy oil.

When OPEC announced on Mar. 23 that it would take a total of 2.1 million b/d of production out of the market, including contributions from Mexico, Norway, Oman, and Russia, Brent crude for May delivery stood at $13.88/bbl (OGJ, Mar. 29, 1999. p. 18).

"Yet not a single barrel has been taken out of the market yet," said Drollas. "The Saudis have told their customers that, from Apr. 1, there will be an 11% cut in their export contracts, but as for the others, we have no idea what will happen. It will be another 30-40 days before the markets notice any significant effect from oil deliveries not arriving. All the current oil price rise is on paper, in anticipation of production cuts." Drollas said crude demand may have crept up without any effect yet being noticeable in supply and demand figures from the International Energy Agency, Paris.

"Crude oil demand has probably been a little bit higher than analysts have been thinking," said Drollas, "but I do feel that this current price is overdone. There's no real reason why Brent crude should be at $14.50/bbl."