Market watch: Oil futures drop as OPEC maintains production quotas

March 12, 2003
Oil futures prices in New York fell on news that the Organization of Petroleum Exporting Countries decided to maintain production quotas and as the risk of immediate war in Iraq appeared to diminish.

By OGJ editors

HOUSTON, Mar. 12 -- Oil futures prices in New York fell Tuesday on news that the Organization of Petroleum Exporting Countries decided to maintain production quotas and as the risk of immediate war in Iraq appeared to diminish because of undecided members on the United Nations Security Council.

OPEC oil ministers met in Vienna Tuesday and agreed to maintain current production quotas, although the average price members receive from their oil has exceeded OPEC's price target of $22-28/bbl so far this year.

The April contract for benchmark US light, sweet crudes dropped 55¢ to $36.72/bbl Tuesday on NYMEX, while the May position dropped by 54¢ to $35.74/bbl.

Analysts said the key factor behind Tuesday's trading was assurances from OPEC members that they were ready to deal with any supply shortages.

OPEC has said it will keep at least 2 million b/d of extra production capacity ready for use in case of a world supply shortage. Meanwhile, the International Energy Agency has suggested that OPEC has spare capacity of less than 1 million b/d.

"Despite their limited spare capacity quote, the IEA does recognize that 'some producers have prepositioned stocks' near end-user markets," Tyler Dann, a Banc of America Securities analyst, said Wednesday.

"The IEA still forecasts strong demand growth of 1.56% in 2003. The (first quarter 2003) estimate remains relatively strong as well at 78.2 million b/d, up 2.1% (vs. first quarter 2002)," Dann said.

OPEC members Algeria, Indonesia, Iran, Kuwait, and Libya have called for a peaceful resolution through the UN to the Iraqi crisis. They have said the Security Council also should hear from regional organizations, including the European Union and the African Union.

Meanwhile, the UN Security Council is divided. The 15-member council needs 9 votes for a major vote, but 6 countries are uncommitted. Officials from both the US and UK Tuesday indicated they could accept an extension of their proposed Mar. 17 deadline for Iraq to disarm.

For the first time, US officials have said they might go to war with Iraq without the support of the UK if a UN resolution fails. UK Prime Minister Tony Blair is experiencing opposition in his own country to the idea of joining with the US in a military strike against Iraq.

Other prices
Forecasts of lower-than-normal temperatures in the US Northeast also helped weaken natural gas and heating oil prices.

The April natural gas contract slumped by 57.1¢ to $5.94/Mcf Tuesday on the New York Mercantile Exchange.

Unleaded gasoline for April delivery fell 2.95¢ to $1.0987/gal, while heating oil for the same month dropped 5.55¢ to $1.0302/gal Tuesday on NYMEX.

In London, the April contract for North Sea Brent oil lost 40¢ to $33.29/bbl Tuesday on the International Petroleum Exchange.

The April natural gas contract gained 1¢ to the equivalent of $2.95/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes lost 54¢ to $32.54/bbl Monday.