By the OGJ Online Staff
LONDON, Nov. 23 -- Oil prices have again retreated below what London traders describe as "the psychologically important " $20/bbl mark, as Russian surprised the market by announcing production cuts far below those expected by the Organization of Oil Exporting Countries (OPEC) in support of the cartel's planned output cuts.
Brent North Sea crude for January delivery rallied $1.32 to $20.05/bbl shortly after Norway said it would cut output by 100,000-200,000 b/d, but now it has dropped to $18.91, and further falls are now being predicted with some trades already taking place at $18.60.
OPEC said officially that it would not proceed with its production cuts unless the group receives the full 500,000 b/d supply cut it has demanded from non-members.
Initial reports from Moscow indicated that cuts of around 100,000 b/d would be announced, three times more than had originally been offered and rejected as derisory by OPEC.
The decision by Russian producing companies now increases the likelihood of a further slump in prices while OPEC digests what it will inevitably interpret as a rejection of its call for cooperation from non-member exporters.
The Russian prime minister, Mikhail Kasyanov, met the leading Russian producing oil companies to discuss a decrease in output or export cuts today. Russia previously said it would curtail production by 30,000 b/d, an offer dismissed as derisory by OPEC. The cartel, in turn, threatened to flood the market with cheap oil in a move that would hurt all producers.
It had been expected that at today's meeting Russia would voice concern about the effect on its own economy of a price war and was expected to announce a reduction of around 100,000 b/d.
Taking part in today's meeting were all Russia's major oil producers, OAO Lukoil, OAO Yukos Oil Co., Rosnett Oil Co., Surgutneftegaz Co., OAO Sibneft, and Tyumen Oil Co.
However, the official announcement, when it came, was that cuts would only be in the region of 50,000 b/d, equal to 10 min of Russia's total daily output.
Leonid Fedun, Vice-Pres. of Lukoil said that the government and companies plan to draft an agreement on the cuts by Dec. 10 and they will come into effect in 2002. He said that Lukoil faced a difficulty in closing down Siberian production as cutting flows increased flooding in the reservoirs involved.
The fact that none of Russia's top six producers is state-owned makes it more difficult for the government to control their output, even though it has some leverage over their exports through the state-owned Transneft pipeline network. Neverthless, with Russian output running at 7 million b/d, cuts of such a small size would be difficult to monitor.
The companies had said before today's meeting they would obey any government order for cuts.
OPEC had asked Russia to cut by as much as 300,000 b/d. Otherwise, OPEC said it won't pursue its own reductions, threatening to start a price war.
Russia's deputy prime minister, Viktor Khristenko, has dropped broad hints this week that Russia is ready to take such action and several oil companies have also said reductions could be made.
Reports within Russia suggested that the expected increased export cuts by Russia were to be described as "due to technical factors," associated with meeting increased winter domestic demand, rather than being described as direct support for OPEC.
Earlier this month, OPEC said it would cut production by 1.5 millionb/d, but only if non-OPEC countries cut production by 500,000 b/d. OPEC has already reduced production by 3.5 million b/d this year to try and meet oil price targets of $22-28, but analysts consider a target of $20-25 more realistic in the current economic conditions.
Mexico has already offered a reduction of 100,000 b/d and Norway on Thursday said it was ready to cut by between 100,000 and 200,000 b/d.
One effect of lower prices is that oil-consuming countries are seeing lower transport costs for the crude they buy.
London tanker broker Galbraiths said in its latest monthly report on the outlook for the tanker market that it is seeing tanker charter rates lower than at any time since 1993-94 for Arabian Gulf loadings.
The report says, "Rates tell a sad story of limited new business and zero confidence."
The cost of transporting oil to the US has fallen to $1/bbl, and to half of that to the Asian market. This means that since mid-September the US oil transport bill has fallen by around $3.5 million/day for delivery from the Arabian ports.
