OPEC slashes output but falls short of target

David Knott
Senior Editor

The Organization of Petroleum Exporting Countries reduced oil production dramatically during April but failed to meet targeted cuts.

Total OPEC output averaged 26.31 million b/d in April, according to Middle East Economic Survey (MEES), down from 27.77 million b/d in March, because of a cutback agreement by OPEC members in March (OGJ, Mar. 29, 1999, p. 18).

However, the agreement called for the OPEC membership-excluding Iraq-to cut combined output to 22.976 million b/d, but these 10 countries could reduce output only to 23.53 million b/d in April (see table).

The cutback pledge by the 10 OPEC countries and Oman, Norway, Russia, and Mexico was an attempt to revive oil prices from the lows achieved earlier this year, when Brent crude futures sank below $10/bbl for the first time.

Price movements

Initially, the March agreement did rally prices, with Brent crude almost reaching $17/bbl despite there being no evidence that any cuts had taken place yet.

At the close of trading in London May 18, dated Brent crude stood at $14.44/bbl, and Brent crude for July delivery stood at $15.29/bbl, still strong compared with recent prices but showing a significant fall over several days.

The fall was attributed to a realization by traders that the price rally had been stronger than the crude oil supply/demand balance justified and to the exit of speculators from the market after reaping short-term gains.

On May 19, a Saudi official told Reuters that the Saudi government was determined to do all it could to lift Brent blend prices to $18-20/bbl.

The official said that OPEC and other producers should not talk about raising output until the price of Brent holds at more than $18/bbl for 3-5 months and the market needs more oil.

MEES said that the April production figures for OPEC showed a good start, in terms of compliance with the cutback pledge, and that compliance rates are expected to get better still as the cuts become more consolidated in May and June.

The efforts of the 10 OPEC signatories of the pledge were significantly offset in April by an unexpectedly large output surge of 330,000 b/d from Iraq, where output reached a post-Persian Gulf war high of 2.78 million b/d.

Expected setback arrives

London's Centre for Global Energy Studies (CGES) said the amazing expectations-driven surge in the wake of the cutback agreement was bound to suffer a setback, which has duly arrived.

"Under pressure from savaged margins," said CGES, "refining is slowing down in Europe and prompt cargoes-especially of Iraqi oil-remain plentiful all round.

"Obviously, OPEC's compliance remains a key issue at the moment, along with the true magnitude of the inventory overhang. If OPEC really wants prices above $18/bbl, there is still some way to go."