OPEC expected to make additional cuts in oil output

March 15, 2001
Members of the Organization of Petroleum Exporting Countries are expected to agree to a cut in their collective production Friday. Observers say a reduction appears a foregone conclusion, though speculation as to the exact volume ranges from 500,000-1 million b/d.


Darius Snieckus
OGL Online


VIENNA, Mar. 15�Members of the Organization of Petroleum Exporting Countries are expected to cut their collective production Friday, following predictions by the International Energy Agency Wednesday that global oil demand will slip by 110,000 b/d under the influence of the slowing US economy.

Industry observers say a reduction, on top of the 1.5 million b/d cut agreed in January by the 10 quota-bound members of OPEC, appears a foregone conclusion. Speculation as to the exact volume ranges from 500,000-1 million b/d.

The move by OPEC is aimed at keeping crude price above the organization's $25/bbl benchmark.

Roger Diwan, the Petroleum Finance Co.'s managing director for markets and countries, said a potential sticking point is�since there is still some 500,000 b/d to be cut from the quota reductions agreed 2 months ago�the "higher the number, the less credible� the new production cut will be in the eyes of the oil market.

"They still have half a million barrels to cut from the previous one, so if they cut a million (bbl) here, it makes the notion that they will cut 1.5 million bbl in the next 40 days a very tall order," said Diwan. He nonetheless foresees an output reduction of not less than 750,000 b/d.

With the seasonal shift in demand expected in April, he notes, OPEC will soon be a position to start increasing production anew, highlighting the psychological market brinksmanship behind this latest output reduction.

"What's better," he asked, "a big cut with slow compliance, or a small cut with good compliance? And in the end, do they (OPEC) care about the barrels or the pychological effect of the announcement?

"The crude market is only going to be weak for a little while longer and then it becomes manageable again," he added.

Though OPEC members continue to have the "same goal," ensuring a compromise will be reached on production quotas, in the end Saudi Arabia, OPEC's largest producing member, is expected to continue to play its traditionally hawkish role, Diwan believes.

First indications that a large production cut was in the offing came from Saudi Arabian Minister of Petroleum Ali I. Naimi on Monday. In a statement released following a meeting with his opposite numbers from Venezuela and non-OPEC Mexico, Naimi that there would a reduction to OPEC output angled at "preserv(ing) prices at the target level of $25/bbl." Naimi's view was at a slight variance with a joint statement released by the three ministers, which said there was a "need to balance supply and demand to achieve (this) price."

Meanwhile, Deutsche Bank AG said earlier this week that building inventories, declining OPEC quota compliance, weak demand, and rising Iraqi production, (which IEA calculated to have climbed 320,000 b/d last month), "all conspire against OPEC's effort to reduce production quotas on Friday."

The bank said it foresaw a headline cut of between 500,000-700,000 b/d, a reduction that will come up short of the 1 million b/d cut needed, it said, to keep Organization for Economic Cooperation and Development inventories flat at around 54 days, placing a downward pressure on crude prices.

There have also been suggestions, made by the Middle East Economic Survey among others, that overproduction by individual OPEC member states is going to prove a further factor in the downside price outlook.

According to MEES, Iran produced almost 200,000 b/d above quota in February, as did some seven other OPEC states, calling into question the veracity of the much-lauded "united front" shown by the organization through the volatility ride of crude prices over the last few years.

The London-based Centre for Global Energy Studies, in its latest oil market report, counseled OPEC "avoid the temptation to cut again" to achieve that target on a daily basis, since it would be achieving this price on average over the year in any case.

"In the longer term, the concern remains that prices can only be kept at OPEC's target level by preventing the rebuilding of oil stocks before and during the summer," the CGES cautioned. "This will leave oil prices volatile."

World oil production fell in February by 700,000 b/d to 77.25 million b/d, almost entirely due to OPEC supply cuts, according to IEA figures. Output from the organization, excluding Iraq, decreased by 1.02 million b/d to 27.5 million b/d, 550,000 b/d above the latest target of 25.2 million b/d.

Problematically, production from Iraq, OPEC's eleventh member but not bound to quota cuts agreed by the organization, rose to nearly 2 million b/d in February, placing added pressure on OPEC to gamble on a larger production cut to counteract this single output increase.

As Deutsche Bank notes, "Divining Iraq's direction is a fool's game that OPEC seems no better at playing than anybody else. We expect Iraqi production to rise over the next few months."