Sam Fletcher
OGJ Senior Writer
HOUSTON, Jan. 8 -- Futures prices for oil and petroleum products plunged lower Tuesday as ministers of the Organization of Petroleum Exporting Countries said they will meet Sunday in Vienna to discuss the current market situation.
Abdullah bin Hamad Al Attiyan, Qatar's energy minister who became OPEC conference president on Jan. 1, Wednesday refuted reports that the ministers have already agreed to hike the group's total production ceiling by 500,000 b/d. There has been no official proposal of that sort from any OPEC member, he said.
However, Paul Horsnell with J.P. Morgan Securities Inc., London, speculated in a Wednesday report that OPEC ministers will "agree to an increase in quotas of at least 1 million b/d, with Saudi Arabia likely to push for 1.5 million b/d and to talk as high as 2 million b/d."
He said, "Current prices are seen as a problem, and Saudi Arabia is prepared to throw oil at that problem. Expect a compromise between the spare-capacity poor and the spare-capacity rich (OPEC members) of perhaps 1.2 million b/d."
Others sources have indicated that Libya and Algeria are backing a proposed production increase of 1 million b/d while Saudi Arabia favors 1.5 million b/d. The compromise could be "as much as 1.3 million b/d," those sources said.
"The key point about OPEC's actions is that, unlike in 2000, there is a desire to bring prices back within the ($22-28/bbl) target band rapidly, and the urgency of that desire should not be underestimated," Horsnell said. However, he expressed "doubt that this (projected 1.2 million b/d increase) will be enough to both push prices back within the target band in quick order and to keep them there."
While market attention during the last 10 months has focused on a potential military conflict between US-led forces and Iraq, Venezuela's 38-day-old general strike has been the real driving force behind the latest run-up of oil prices in recent weeks by slashing Venezuela's oil production to less than 500,000 b/d.
As a result, said Horsnell, "The old favorite game of counting OPEC spare capacity is now back with a vengeance."
Before the strike aimed at ousting President Hugo Chávez, Venezuela's normal crude exports combined with Iraq's current exports would have totaled 4.5 million b/d, Horsnell reckoned.
"Excluding Saudi Arabia, we estimate that the rest of OPEC can muster about 1.2 million b/d of extra sustainable capacity, of which the UAE possess about half," he said. "We would put Saudi (production) capacity as high as 10.5 million b/d, making a total current spare capacity for OPEC (outside Iraq and Venezuela) of 3.7 million b/d. In other words, it looks a bit tight."
However, Horsnell noted, other estimates put Saudi production capacity "as low as 9.5 million b/d, in which case OPEC would be able to cover (export losses from) Venezuela or Iraq, but not both."
Moreover, he claimed, efforts to balance supply with demand in the world oil market "should perhaps have come first from the US government," instead of OPEC. "The heavy caverns of the Strategic Petroleum Reserve primarily contain Mexican Mayan crude, a reasonable quality match for much of (imported Venezuelan oil) that has been lost, and some of the SPR facilities are just a few miles from the (Gulf Coast) refineries that have been most heavily affected," he said.
The fact that SPR oil has not yet been released in an effort to blunt the recent oil price spike is due in part to a "usually unspoken desire" among US officials "to keep one's powder dry until the war against Iraq starts," Horsnell said.
However, analysts at UBS Warburg LLC, New York, claim the political outcome of Venezuela's strike is "as important" as the result of an attack on Iraq that they anticipate could occur in February. They reported earlier this week that, under Chávez, Venezuela's oil production capacity has fallen to 2.9 million b/d, with the national oil company, Petroleos de Venezuela SA (PDVSA), producing at or close to that capacity since the second quarter of 2002.
If opponents oust Chávez, who has maintained a "rigid adherence" to the OPEC production quota allotted Venezuela, said UBS Warburg analysts, "There is no opportunity for a new government to 'open the taps' and produce more."
Similarly if Saddam Hussein is ousted from control of Iraq's government, UBS Warburg said, "rehabilitation and repair (of existing oil production and export facilities) are likely to be the priorities of an interim, and later an elected, government, rather that the rapid expansion of production capacity financed by foreign investors."
On Tuesday, the February contract for benchmark US light, sweet crudes fell by $1.02 to $31.08/bbl on the New York Mercantile Exchange, down $2/bbl net in 2 days of trading. The March oil position retreated by 89¢ Tuesday to $30.55/bbl. Unleaded gasoline for February delivery plunged 4.02¢ to 84.18¢/gal. Heating oil for the same month dropped 3.91¢ to 84.88¢/gal.
The February natural gas contract shot up 19.2¢ to $5.13/Mcf on NYMEX, "driven by on-again, off-again cold weather forecasts that are on-again," said analysts at Enerfax Daily.
"The market is hypersensitive of late to the slightest variations in day-to-day weather predictions," they explained. "Also, a wave of technical buying helped fuel the rally." They said confirmation of more bullish weather forecasts "could easily push prices" above $5.20/Mcf.
In London, the February contract for North Sea Brent oil fell by 87¢ to $29.33/bbl on the International Petroleum Exchange. The February natural gas contract plummeted by 17.8¢ to the equivalent of $3.66/Mcf, down 34.4¢ total over 2 days of IPE trading.
The average price for OPEC's basket of benchmark oils lost 99¢ Tuesday to $29.72/bbl. OPEC's price band mechanism calls for members to adjust production quotas up or down by 500,000 b/d for each $1/bbl that its average basket price remains above or below the target band of $22-28/bbl for 20 consecutive trading days. That mechanism could be triggered on Jan. 16, if OPEC's basket price doesn't retreat below $28/bbl before then.
Contact Sam Fletcher at [email protected]
