By the OGJ Online Staff
HOUSTON, Oct. 29 -- The biggest problem the Organization of Petroleum Exporting Countries faces in its proposal to cut oil output quotas is to break the market's misperception "that prices cannot recover," a London-based financial analyst said Monday.
Many other market analysts claim OPEC maybe cannot afford to reduce its output if other non-OPEC producers step in to take more of its market share.
But Paul Horsnell at J.P. Morgan Chase & Co. said Monday that OPEC members apparently achieved full compliance during October with their last production cut of 1 million bbl, effective Sept. 1, which "is sufficient to lead to prices firming," even without another cut.
OPEC is expected to reduce its oil production quotas by another 1 million b/d at the scheduled meeting of member ministers Nov. 14 in Vienna.
The average price for OPEC's basket of seven crudes has remained below its targeted price range of $22-$28/bbl since Sept. 24, when international energy markets experienced the biggest 1-day drop in prices since the US and its allies launched the Desert Storm attack on Iraq in 1991.
Horsnell described it at the time as "a direct challenge to the (OPEC) price band" by speculators who assumed key OPEC members such as Saudi Arabia and Kuwait would be pressured by US government officials not to reduce oil production while the US takes military action against Osama bin Laden and his terrorists (OGJ Online, Sept. 25, 2001).
Although they have hesitated to act so far, OPEC ministers are under economic pressure to restore their command of the market and to boost the oil revenues on which their countries depend.
However, previous cutbacks in OPEC production this year are "greater than the fall in demand (for oil) plus the rise in non-OPEC production," Horsnell said in a report issued Monday.
"For the last month, market perceptions have been dominated by the demand side, but now we seem to be returning to a supply side . . . story," he said.
Following a meeting Saturday in Abu Dhabi, the oil ministers of Oman, Saudi Arabia, and the United Arab Emirates released a joint statement in which Oman became the first non-OPEC producer to express its readiness to cooperate with the cartel in reducing production and driving up prices.
Oman is the ninth largest oil producer and the sixth largest oil exporter outside of the cartel, Horsnell noted.
Moreover, Saudi Arabia officially endorsed in that statement the proposal to reduce OPEC production in order to boost oil prices. That, said Horsnell, "confirms that Saudi policy has not changed," despite any pressure from US government officials to hold the line on production during the military campaign against terrorists in Afghanistan. The ministers denied in their statement that they had been submitted to such pressure.
"Adding to this the growing tide of other ministerial statements, the impetus for a further production cut at OPEC's Nov. 14 meeting has continued to build," Horsnell said.
OPEC production and market experts are meeting today in Vienna with their peers from seven non-member producing countries: Angola, Egypt, Kazakhstan, Mexico, Norway, Oman, and Russia. Those experts, said Saudi Arabia Oil Minister Ali al-Naimi, "will distill the numbers and advise us on the size of the cut" at the November meeting.
Unlike Oman, other non-OPEC producers have not expressed willingness either to freeze current production or moderate growth. The UK, which has always avoided close connections with OPEC, declined an invitation to attend the Monday meeting.
"The new Norwegian government has ruled out a contribution (to reducing output)," Horsnell noted. However, he said, "The presence of a Norwegian representative at the Vienna meeting suggests that it wishes to maintain cordial relations with OPEC and to signal that the cautionary shot across the bow that OPEC has fired has been noted."
Horsnell said, "OPEC's main problem still remains breaking the current market fixation on linking price expectations one-to-one with demand expectations. That fixation leads to the widespread view that prices cannot recover."
However, he said, "As OPEC has now withdrawn some 1 million b/d from the market over the last 2 months and is now headed for a further cut, the contraction on the supply side is greater than that on the demand side."
The resulting pressure will push up prices, he said, "either quickly when the market remembers that supply also has some relevance, or slowly if current perceptions have to be worn away through a process of attrition."
