Sam Fletcher
OGJ Online
HOUSTON, Nov. 14 -- Ministers of the Organization of Petroleum Exporting Countries agreed Wednesday to cut their oil production quotas by 1.5 million b/d by Jan. 1, but only if non-OPEC producers also reduce their combined output by 500,000 b/d so as not to infringe on the cartel's market share.
Otherwise, Ali al-Naimi, Saudi Arabia's oil minister, indicated that his country was ready to unleash its oil production capacity in another price war for control of world markets. He was quoted as saying at that meeting, "you know what happened in 1985 and 1986" when Saudi Arabia flooded the markets with oil and pushed prices below $10/bbl to dry up non-OPEC supplies that cost more to produce.
In his opening address, Chakib Khelil, conference president, noted that OPEC members had already slashed production quotas by 3.5 million b/d, or 13%, on three separate occasions earlier this year, "together with the resulting revenue, partly to the benefit of non-OPEC producers."
OPEC's hardline approach apparently is aimed primarily at Russia, the only non-OPEC producer with the potential production capacity to challenge OPEC's control of world markets. At the close of Wednesday's meeting, OPEC members expressed appreciation for "the positive responses expressed by some non-OPEC producers, especially Mexico and Oman," both of which signaled support for a cut in OPEC production prior to the meeting.
World energy prices shot up late last week when Russian Prime Minister Mikhail Kasyanov said Russian oil companies were prepared to reduce crude exports to support a cut in OPEC production. However, Al-Naimi apparently is pushing for a stronger commitment from the Russians.
Paul Horsnell, head of energy research for JP Morgan Chase & Co. in London, earlier predicted that any production cut by OPEC would be "explicitly linked to further cooperation from non-OPEC countries, making it clear that the price war threat is not an idle one."
It amounts to test of wills between Russia and OPEC in "the oil market equivalent of the Cuban missile crisis," Horsnell said.
"The implication is clear. Unless Russia cooperates, OPEC is prepared to let prices collapse until Russia changes its mind," he said. "OPEC is effectively saying, 'You can cooperate now, and we'll get the prices back up. Alternatively, you can wait as long as you like before making that cooperation, and in the meantime your economy may be torn to shreds.'"
If Russia withholds its support of OPEC, Horsnell said, "We would be on the verge of a very major move down to well below $15/bbl. With that support, prices can head back towards $25/bbl."
He claimed traders, market analysts, and international political leaders have all underestimated OPEC's determination to regain control of the world oil market.
"Staying sustainably at current prices is not an option. The only two options are all or nothing as far as OPEC is concerned," Horsnell said.
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