OPEC sets automatic oil output adjustments

April 10, 2000
With oil prices dominating industry news in recent months, the continuing strength in US natural gas prices seems to be getting overlooked.

In addition to agreeing to an immediate increase in oil production at their recent summit in Vienna, members of the Organization of Petroleum Exporting Countries also agreed to an oil price stabilization mechanism. Meanwhile, some non-OPEC members have announced production increases of their own.

Ali Rodriguez, Venezuela's energy minister, said nine OPEC nations, in addition to agreeing to increase production by 1.45 million b/d, also agreed to automatic production adjustments (OGJ, Apr. 3, 2000, p. 26). He said OPEC will raise output when the export price of OPEC's basket of crudes exceeds $28/bbl and lower it when it falls below $22.

If oil prices shift outside the fixed price-band system for 20 consecutive days, OPEC would either increase or decrease output by about 500,000 b/d until the price returned to levels within the price band. Volume would be adjusted pro rata, depending on member nations' production quotas.

Saudi Arabia reportedly wanted the price band to be between $20 and $25 for the benchmark North Sea Brent crude.

Rodriguez said, "From now on, we are going to have a more stable market." He predicted that oil prices would hold steady at $20-25/bbl until May 1.

Rodriguez said world oil demand was 77.3 million b/d in the first quarter and is expected to drop to 74.8 million b/d in the second quarter before rising in the third quarter to 78.5 million b/d. He said the average for 2000 would be about 76.7 million b/d.

He said as little as 500,000 b/d of extra OPEC oil could reach markets in April, because several members already were producing above their quotas before the accord was struck.

Rodriguez predicted OPEC officially would boost production quotas either at its June 21 or Sept. 10 meetings to meet rising world demand.

More output

After the OPEC meeting, Mexico and Norway announced production increases. Neither is an OPEC member.

Mexico had cut exports by 325,000 b/d last year, capping them at 1.52 million b/d as part of the effort to boost low prices. Energy Minister Luis T

Norway said it would raise its oil output 100,000 b/d in April, about half of the volume that it has been keeping off the market. Norway, the second largest exporter behind Saudi Arabia, produced 3.3 million b/d in February.

Iraqi oil minister Amer Mohammed Rasheed said Iraq would increase its production 150,000 b/d each week in April until its output had risen by 700,000 b/d to 3.1 million b/d in May. Iraq was not a party to the OPEC deal.

The UN Security Council has allowed Iraq to double its purchases of spare parts for the oil industry to $600 million every 6 months.

Rasheed claimed Saudi Arabia and Kuwait forced the OPEC production increase by boosting their own output a combined 1 million b/d in February and March, and he predicted the OPEC deal would push prices for the benchmark Brent crude down a few dollars.

Reactions

The Centre for Global Energy Studies, London, predicts that oil prices will remain at $26-27/bbl in the second quarter because OPEC's pact to boost output won't allow inventories to be rebuilt.

It said 9 out of 11 OPEC members agreed on a 1.4 million b/d increase, but they were producing about 1 million b/d above quotas, so only an extra 774,000 b/d would go to market. CGES said another 300,000-400,000 b/d from quota cheating would bring the total increase to 1.1 million.

CGES said that level would "not have a significant downward impact on oil prices, although it should prevent them from returning to $30/bbl. Unless revised in June, the agreed increase is expected to leave the price between $26 and $27/bbl, on average, in the second and third quarters."

US Energy Sec. Bill Richardson said OPEC's action was "good news for everyone." He predicted US gasoline prices would drop within 6 weeks as oil prices fall.

Richardson said OPEC's official output increases, extra non-OPEC production, and quota cheating should bring an extra 2.8 million b/d to the market.

Richardson said US gasoline prices "will gradually decline by 11¢/gal" between now and September.

President Bill Clinton said oil companies should pass the lower prices to consumers rapidly.

"While home heating costs and the price at the pump are both expected to fall in the next few weeks, I urge the oil companies to do everything they can to bring the savings to consumers as quickly as possible."

George Gaspar, of Robert W. Baird & Co. Inc., said OPEC's accord would only gradually reduce prices to $25-28/bbl over the next 3 months.