Sam Fletcher
Senior Writer
HOUSTON, Sept. 25 -- Futures prices for oil and petroleum products surged Wednesday in a buying frenzy on New York and London markets, following a surprise decision by the Organization of Petroleum Exporting Countries to cut production by 900,000 b/d as of Nov. 1.
That effectively offset previous action at OPEC's April meeting when members raised production quotas by 900,000 b/d as of June 1. At that time, OPEC ministers also announced a simultaneous 2 million b/d cut in actual production in an attempt to reign in overproduction and regain credibility in world markets.
"Since June, production by the OPEC 10 [the active members minus Iraq] has risen by 70,000 b/d to 25.8 million b/d. Including Iraq, production has risen by 640,000 b/d to an estimated 26.9 million b/d," said Frederick P. Leuffer, an analyst with Bear, Stearns & Co. Inc., New York.
Make room for Iraq
OPEC's decision to cut production ahead of increased winter demand was generally viewed by analysts as a move to make room for additional oil production from Iraq, which was represented at the group's meeting Wednesday in Vienna for the first time since the invasion of that country by US-led coalition forces to oust Saddam Hussein from power.
Ibrahim Bahr al-Ulum, Iraq's new oil minister, said his country is now exporting 900,000 b/d of oil and expects to increase exports to 1.5 million b/d by the end of this year and to 1.8 million b/d by the end of March (OGJ Online, Sept. 24, 2003). Iraq currently is producing 1.8 million b/d, but is forced to reinject 200,000-250,000 b/d, he said.
S. Magnus Fyhr, an analyst in the Houston office of Jefferies & Co. Inc., New York, put Iraq's production even higher. "While Iraqi production has been averaging about 1 million b/d for most of the summer, [it] has increased to 1.5-1.8 million b/d during the past few weeks and is expected to reach 2.8 million b/d by the end of March," he said. "This forecast is significantly ahead of our expectations, as we believe increasing terrorist activity in Iraq will continue to limit exports from the northern oil fields of Kirkuk."
Frequent pipeline explosions and fires—usually blamed on terrorist attacks—in northern Iraq have hindered efforts to transport crude to Iraqi refineries or to an export terminal in the Mediterranean port of Ceyhan, Turkey.
"However, given the projected increases in Iraqi production and the fact that oil prices [declined more than] $3/bbl during the past 3 weeks, we understand why OPEC is taking a more cautious view on near-term . . . production to support oil prices above $25/bbl," Fyhr said.
OPEC protects revenue
"OPEC is sending a signal that, for now, it remains focused on revenue enhancement, at the expense of market-share protection," said Leuffer. "However, it remains to be seen whether OPEC actually will cut production. Through August, only Venezuela, which is still suffering the effects of the oil workers' strike, and Indonesia [were] in compliance with current quotas."
He speculated that current world oil supplies exceed projected fourth-quarter demand by 1.1 million b/d. "Our estimates of the 'call' on OPEC oil in the third and fourth quarters are 24.8 million b/d and 25.8 million b/d, respectively. Based on August production, OPEC volumes exceed our estimate by 1.5 million b/d in the fourth quarter," Leuffer said.
"The key point is that OPEC was going to have to cut at some point in the coming months," said Paul Horsnell, head of energy research at Barclays Capital Research, a division of Barclays Bank PLC, London. "Before this meeting, quotas stood 3.7 million b/d higher than they did a year ago. Further, OPEC members, excluding Iraq, stand to finish this year having produced [in excess of] 2 million b/d more, on average, than in 2002."
OPEC ministers continued to urge cooperation with major non-OPEC producers, and six non-OPEC producers attended Wednesday's meeting. However, Horsnell said, "It would have been approaching unreasonable behavior to tie the first of a series of cuts to cooperation from non-OPEC producers," as OPEC has done in the past.
Energy prices jump
The November contract for benchmark US light, sweet crudes immediately soared by $1.11 to $28.24/bbl Wednesday on the New York Mercantile Exchange in the biggest 1-day jump in that market since Aug. 1. The December contract for benchmark US oil escalated by $1.07 to $27.96/bbl. The spot market cash price for benchmark US crude at Cushing, Okla., shot up by $1.15 to $28.08/bbl Wednesday.
Unleaded gasoline for October delivery jumped by 5.59¢ to 86.54¢/gal Wednesday on NYMEX. Heating oil for the same month rose by 3.69¢ to 74.52¢/gal.
The October natural gas contract gained 7.7¢ to $4.59/Mcf Wednesday on NYMEX, "underpinned by a firm cash [market] and [the] rally in crude oil, despite mild weather forecasts through next week that should slow demand," said analysts Thursday at Enerfax Daily. The October natural gas contract expires at the end of Friday's NYMEX session.
Meanwhile, the US Energy Information Administration said Thursday that 100 bcf of natural gas were injected into US underground storage during the week ended Sept. 19. It marked the second consecutive weekly injection of 100 bcf or more, with 102 bcf being injected the previous week. US gas storage now totals 2.69 tcf, down by 302 bcf from year-ago levels and 93 bcf below the 5-year average.
In London, the November contract for North Sea Brent oil gained $1.15 to $26.67/bbl Wednesday on the International Petroleum Exchange. OPEC's production cut may have halted the previous downward drift in that market, brokers said.
However, the October natural gas contract fell by 8.1¢ to the equivalent of $3.20/Mcf Wednesday on IPE.
The average price for OPEC's basket of seven benchmark crudes increased by 45¢ to $25.59/bbl Wednesday.
Contact Sam Fletcher at [email protected]
