OPEC's gamble with markets

Is OPEC playing "chicken" again with oil markets? Some of the price hawks in the organization-Venezuela seeming to be the chief hawk, a 180° turnabout from just a few years ago-are talking up prospects for yet another production cut at the March ministerial meeting in Vienna.

The fundamentals of the market right now indicate that, while oil prices have moderated since early December, there is little likelihood now of a complete collapse in oil prices that would warrant another sizeable OPEC cut. Nevertheless, some in OPEC see a decline in its marker basket of crude prices below $25/bbl as a green light for another cut.

By the end of the first quarter, WTI will have fallen $10/bbl from its early fourth quarter 2000 peak, predicts Energy Security Analysis Inc., Wakefield, Mass.

ESAI points to the decline in refiner demand that always occurs this time of year as the culprit in near-term price weakness. Already, a number of US refineries are in turnaround, with those in Europe soon to follow.

But the analyst contends that "even as prices decline, evidence is building that crude inventories in the US will remain lean in 2001," citing two main reasons why inventories may have a hard time rising: "1) Even as prices decline in the short term, it is not clear that contango will emerge to the degree necessary to encourage stocking. 2) Refinery throughput should be high enough in the summer to absorb even high crude imports."

ESAI thinks the first quarter price decline may be followed by a significant summertime rally when demand rises again.

Iraqi wild card

Once again, Iraq has emerged as an oil market wild card.

London's Centre for Global Energy Studies points to the continued absence of sustained oil exports from Iraq serving as a crucial support for OPEC's pursuit of higher oil prices.

Because Saddam Hussein sees none of the funds emanating from the UN-sponsored oil-for-aid sales program, he is willing to forego those larger exports for revenues from smaller volumes-about 200,000 b/d via Syria-outside of UN control, CGES contends.

"Potential buyers of Iraqi oil under the oil-for-food deal will lift only if the market is sufficiently tight that they can pass the surcharge on to their customers," the London think tank said. "With the market weak, Iraq's oil is likely to remain at Ceyhan and Mina al-Bakr.

"As a result, oil exports from Iraq remain highly uncertain, and the world cannot rely on this oil to help balance the market in 2001."

Consequently, says CGES, the market this year looks to be a repeat of 2000, with Atlantic Basin stocks of crude and products starting the year at extremely low levels. It pegs the global stockbuild in 2001 at a puny 50,000 b/d-even if OPEC maintains current output and Iraq fully resumes its prior export levels-not enough to even maintain currently low stockcover levels.

Risk to demand

Both ESAI and CGES contend that OPEC runs the risk of collapsing oil demand growth in 2001.

The two analysts project global oil demand growth at about 1.4 million b/d in 2001, below even the recently reduced projections by IEA and EIA of 1.5-1.6 million b/d.

The long-term risk to markets is great, both say.

Noting that OPEC is also trying to realign its basket to better reflect its members' disproportionate volume of medium and heavy sour crudes while still pushing for a $25/bbl target, ESAI contends that strategy will only inflate further the level to which WTI would have to rise to get the basket to $25/bbl.

"It would behoove OPEC to allow their heavy sour prices to fall further in an effort to pull down light, sweet crude prices and give the US economy a little break," ESAI said. "Otherwise, they will surely wound the goose that lays the golden eggs."

Putting the dilemma in historical terms is CGES, founded by former Saudi oil minister Sheik Ahmed Zaki Yamani, architect of Saudi Arabia's market share recapture in 1985: "If OPEC acts to keep prices high, then demand growth will falter and OPEC will enter a vicious circle of successive output cuts to defend an unsustainable price, as happened in 1984-85."

And everyone in this business remembers what happened in 1986.