Sam Fletcher
Senior Writer
HOUSTON, Apr. 23 -- Energy futures prices tumbled in profit taking Tuesday, ahead of a meeting Thursday of the Organization of Petroleum Exporting Countries at which oil ministers are expected to agree to reduce overproduction by at least 1.5 million b/d, with Saudi Arabia and Kuwait absorbing the bulk of any rollback.
"We expect the outcome of the meeting to be both a reaffirmation of the current 24.5 million b/d quota over the coming months, as well as a renewed commitment to OPEC's price band of $22-28/bbl," said Matthew Warburton, UBS Warburg LLC, New York in a Wednesday report.
"While global inventories could accommodate a less substantial reduction in OPEC volumes given their current low levels, especially in the US, we believe OPEC will undertake a measured reduction in supply of 1.5 million b/d over the next 2-3 months," Warburton said. "Such action...would overcome inherent market skepticism surrounding any reduction in (official) output when (actual) production exceeds quotas and also signal its determination to defend oil prices within its price band."
He said, "Over the last 4 years, the market has continually underestimated the cartel's determination to manage its production to adhere to the OPEC price band of $22-28/bbl (or $24-30/bbl for US benchmark West Texas Intermediate crude), and we believe that to do so now would also be a mistake."
Saudis store production
In March, the 10 active OPEC members, excluding Iraq, produced an estimated 2.5 million b/d above their cumulative quota of 24.5 million b/d.
However, Warburton said, recent tanker tracking data triggered "material downward revisions" in the amount of oil that Saudi Arabia was thought to supply to world markets. "While overall Saudi production had increased to 9.2-9.5 million b/d," he said, "the increased volumes have not been exported but rather produced into domestic storage. Based on the difference of up to 750,000 b/d between production estimates and Saudi supply into world markets, this would imply volumes of 12-24 million bbl have been placed into domestic Saudi storage in March."
By increasing production in conjunction with the US-led invasion of Iraq, the Saudis reassured world markets that they could make up any supply shortages and forestalled the need for US officials to release oil supplies from the Strategic Petroleum Reserve. But by storing that oil in Saudi Arabia instead of shipping it, the Saudis also negated a major increase in tanker rates and avoided paying third-party storage costs, said Warburton.
Iraq's role undecided
Meanwhile, US officials reported Tuesday that US and Iraqi engineers worked together to resume production from 4 wells back in southern Iraq. Other US and Iraqi workers may bring some northern wells back on stream later this week.
The timing for recovery of Iraq's oil production is among the uncertain "supply-side issues" that OPEC ministers are likely to discuss Thursday, said Warburton. "Even though initial supplies (of Iraqi oil) to world markets could be made rapidly available from storage in Ceyhan, Turkey, uncertainties over the legal framework of any such sales or additional production volumes in excess of (Iraq's) internal requirements of 500,000 b/d are likely to complicate OPEC's decision-making at this week's meeting," he said.
Meanwhile, United Nations Sec. Gen. Kofi Annan is agitating for the UN to have a bigger role in rebuilding Iraq, and France is calling for an end of all UN sanctions against that country, including the UN-administered oil-for-aid program.
Venezuela still a factor
Despite repeated claims by Venezuelan government officials that the country's oil production has recovered to November levels after the recent 63-day general strike in that country, Venezuela's current production is estimated at 2.5 million b/d, down from its OPEC quota of 2.82 million b/d.
With refineries in Venezuela resuming operations "primarily to satisfy export opportunities to the US as the driving season commences," said Warburton, "external availability of Venezuelan crude is likely to remain static or even decline temporarily in coming months."
Other OPEC members may be sympathetic to Venezuela's loss of revenue during the long strike, but they're not likely to grant Venezuela's request to set aside its production quota while it makes up that loss, Warburton said. OPEC also is unlikely to grant requests from Algeria and Nigeria for increase in their production quotas.
Unrest in Nigeria
Although recent elections in Nigeria proceeded with less turmoil than some anticipated, Shell Nigeria Exploration & Production Co. Ltd. still is prevented from restarting some 300,000 b/d of oil production previously shut in because of violence, Warburton reported Wednesday. He said Chevron Nigeria Ltd. appears to have restored most of its production previously disrupted in the Warri area of the Niger Delta.
"Given allegations over recent election irregularities, we believe it is conceivable that further civil unrest may emerge once the election process has been completed and the results announced, resulting in further erratic availability," Warburton warned.
Delays in production recovery in Iraq, Venezuela, and Nigeria at the same time that other OPEC members are reducing their current overproduction "could further aggravate the already tight global inventory situation and take effect just at the time that OPEC should be increasing production (later this year) ahead of the seasonal uplift in winter demand," he said.
Market prices
The expiring May contract for benchmark US light, sweet crudes fell 96¢ to $29.91/bbl Tuesday on the New York Mercantile Exchange, while the June position lost 84¢ to $27.99/bbl. Unleaded gasoline for May delivery plunged 3.24¢ to 87.74¢/gal. Heating oil for the same month dropped 2.22¢ to 77.86¢/gal.
The May natural gas contract declined by 6.8¢ to $5.65/Mcf on NYMEX. "Although the market retreated, some analysts see bullish signals in the market that point away from the downward trend," Enerfax Daily reported Wednesday. "A cold spell in the Northeast has already started to drive prices higher there. And while cool midweek forecasts have helped support the cash this week, physical prices are still 10¢ under the futures, a factor that could weigh on futures as the May expiration approaches."
In London, the June contract for North Sea Brent oil dropped 42¢ to $25.46/bbl on the International Petroleum Exchange. The May natural gas contract dipped by 2.1¢ to the equivalent of $2.60/Mcf on IPE.
The average price for OPEC's basket of seven benchmark crudes slipped 40¢ to $26.24/bbl Tuesday.
Contact Sam Fletcher at [email protected]