By Sam Fletcher
Senior Writer
HOUSTON, Sept. 26 -- Energy futures prices ended mixed in trading on the New York Mercantile Exchange Thursday, and Organization of Petroleum Exporting Countries officials said non-OPEC producers will have to join in any future production cuts that might be needed to maintain existing price levels.
OPEC ministers are meeting in Vienna this week. Officials said Thursday that non-OPEC oil exporters such as Russia, Mexico, and Norway will have to help with supply cuts that might be needed next year.
Earlier this week, OPEC ministers decided to cut production by 900,000 b/d. The decision drove up crude oil future prices Wednesday. On Thursday, OPEC ministers predicted a fourth quarter world oil inventory surplus, which would put downward pressure on oil prices.
Analyst's comment
The 900,000 b/d production cut that OPEC has mandated by Nov. 1 is less than half of the reduction needed to prevent a glut of oil on world markets by the end of March, said Stephen A. Smith, founder and president of Stephen Smith Energy Associates, Natchez, Miss.
"Semi-dependable power supply" has returned to Iraq's Mina al-Bakr oil export terminal on the Persian Gulf and to the pipeline system that supplies it, Smith said Thursday. He added that, "Odds have just shifted in favor of Iraq's production at least staying above 1.5 million b/d and quite possibly close to 2 million b/d."
As a result, he said, "Our supply-demand balances for the next 2 quarters suggests the need for a 2 million b/d OPEC-10 [currently active OPEC members, minus Iraq] production cut that should be taken as soon as possible."
Oil production among the OPEC-10 averaged 25.5 million b/d in August, said Smith.
"If this OPEC-10 production [is] maintained for the rest of the year, and Iraq were to maintain its expected September average production of 1.8 million b/d through yearend, then our model projected a yearend surplus storage [among Organization for Economic Cooperation and Development member countries] of 46 million bbl (about 2%)," he said.
OPEC's agreement to reduce production "suggests that the upward August shift in Iraq's oil exporting capacity had not gone unnoticed. Certainly global oil markets had noticed the change in Iraq, which explains why $3[/bbl] was promptly clipped off [benchmark US crudes'] prices earlier in September," Smith said.
To make room for Iraq's increased oil production, the other 10 OPEC members "will most likely be required to take a deeper cut [in their production quotas] in the months ahead," Smith said. "They still have the option to take deeper cuts in December, and based on our current outlook, it appears they will have to do so."
Iraq's outlook
The geographic location of three main ethnic factions will continue to influence the pace of recovery for Iraq's oil industry, Smith said.
Iraq's largest oil field complex is in its Rumaila field that, along with the Mina al-Bakr terminal and connecting pipeline, is "located in the south of Iraq, a region that is dominated by the Shia. The Shia, brutally suppressed by Saddam Hussein, have no interest in sabotaging the pace of oil recovery in retaliation for his removal. Thefts of oil and looting remain a problem but, with the passage of time, an increasingly containable one," said Smith.
Kirkuk, Iraq's second largest oil field, "lies in the heart of northern Iraq, an area strongly controlled by the Kurds," who likewise have no loyalty to the ousted Saddam. However, oil from that field is transported to an export terminal in Ceyhan, Turkey, through a pipeline that "dips down into central Iraq, an area dominated by the Sunnis," he said. "At its most southern point, the pipeline goes near Baiji, a town only 30 miles to the northwest of Tikrit (Saddam's hometown and a center for Saddam Loyalists). All of the postwar attacks on the Kirkuk-Ceyhan line have occurred in this region."
That pipeline currently is out of commission as a result of terrorist attacks. US Army engineers estimated that it will be mid-October before that line is operational.
Iraq's third major pipeline, the "Strategic Pipeline," connects its northern and southern oil-producing areas.
"This line allows Rumaila production to flow north (to northern refineries or to Ceyhan for export) or Kirkuk production to flow south (to southern refineries or to Mina al-Bakr for export)," said Smith. "Unfortunately, this line is only partially operational, and it will take months to repair. In the early days of the war, a US attack at Al-Hadithah did collateral damage to this line."
Meanwhile, he said, "Attacks [on Iraqi oil field facilities] are beginning to establish a pattern, and US [or United Nations' military] units can increase surveillance on vulnerable pipeline sections and other infrastructure targets. Also, the pipeline repair teams will fine-tune their operations. Iraq recovery is a process, and it will evolve to handle the early-stage problems that have been so visible."
Actually, Iraq's "recovery of oil production has been moving along at a better pace than we had forecast in our last [monthly] report, particularly in September," Smith said. As a result, he said, "We are assuming a September [oil production] average of 1.6 million b/d."
He noted that "a member of Iraq's provisional government" recently was quoted as saying Iraq's current production is 1.9 million b/d, "although no details were provided."
Energy prices
The November contract for benchmark US light, sweet crudes rose by 5¢ to $28.29/bbl Thursday on the NYMEX. The December contract for benchmark US oil climbed by 12¢ to $28.08/bbl.
Unleaded gasoline for October delivery jumped by 1.05¢ to 87.59¢/gal Thursday on NYMEX. Heating oil for the same month lost by 0.41¢ to 74.11¢/gal.
The October natural gas contract declined 4.6¢ to $4.54/Mcf Thursday on NYMEX, "pressured by another bearish weekly inventory report and mostly mild weather forecasts for the next couple of weeks that should cut demand," said analysts Friday at Enerfax Daily. The October natural gas contract expires at the end of Friday's NYMEX session.
In London, the November contract for North Sea Brent oil gained 14¢ to $26.81/bbl Thursday on the International Petroleum Exchange.
However, the October natural gas contract fell by 4.23¢ to the equivalent of $3.15/Mcf Thursday on IPE.
The average price for OPEC's basket of seven benchmark crudes increased by 78¢ to $26.37/bbl Thursday.
Contact Sam Fletcher at [email protected]
