Despite knee-jerk purchases that hiked the January contract for benchmark US crudes to $63.43/bbl by Dec. 15, the highest closing in weeks on the New York market, there was little immediate reaction after the Organization of the Petroleum Exporting Countries agreed Dec. 14 to trim production by 500,000 b/d to 25.8 million b/d, effective Feb. 1, “in order to balance supply and demand.”
In October, OPEC ministers voted to reduce crude output by 1.2 million b/d to 26.3 million b/d effective Nov. 1. Although many industry observers said OPEC had curtailed only 800,000 b/d at most, OPEC officials claimed at the December meeting their earlier agreement “succeeded in stabilizing the market and bringing it into balance, although prices remain volatile.”
OPEC’s latest promised reduction “basically comes out to nothing,” said Olivier Jakob at Petromatrix GMBH, Zug, Switzerland. “It is only illustrative of the disagreement within OPEC of the need for any further cuts, buying some more time and letting the market dictate through prices what should be the next step for OPEC,” Jakob said. “If there is a strong price crash then OPEC would cut (but this would be expected anyway); if there is a price increase it will continue to not respect the previous agreement (this is also somehow expected). OPEC could not comply [with the earlier proposed production cut] below $60/bbl, so we should not expect them to comply better above $60/bbl.”
Moreover, he said, “We are somehow back to having Saudi Arabia as the swing balancing producer. While the rest of OPEC will continue with the cheating, this creates a framework where it takes a longer period of time to significantly tighten the crude oil supply and demand.”
Dollar declines
The “additional problem” for OPEC since its October meeting is the dollar index has dropped 4%, “which in terms of OPEC revenues is equivalent to an additional production cut,” said Jakob. While crude prices were higher in mid-December than mid-October, the weakness of the US dollar offset those price gains and reduced OPEC’s revenue. “OPEC would need a stronger dollar to encourage less cheating and better enforce their output cut decisions,” Jakob said. Meanwhile, the US dollar fell to a four-session low against the euro on Dec. 19.
Analysts in the Houston office of Raymond James & Associates Inc. said, “The decision to curtail production for the second time comes on the back of high crude stockpiles in the US and Organization for Economic Cooperation and Development nations, concerns of slowing global growth in 2007, and the pullback in the greenback that has eroded the purchasing power of OPEC members. Going forward, the market will remain skeptical as to the magnitude of the announced cut that will actually be taken off the market come February.”
Nevertheless, Raymond James analysts said: “The cartel seems determined to continue its quest to defend $60/bbl as a price floor for crude oil. On a further note, the cartel has approved the induction of its newest member, Angola. The second-largest producer in Africa will join the cartel in 2007, adding strength to OPEC’s muscle.” Because it has not yet returned to its prewar production level, Iraq is not subject to OPEC production quotas.
Meanwhile, Raymond James said, “Unrest in Nigeria continues to take a toll on oil production. Armed guerrillas attacked a Royal Dutch Shell oil complex in Nigeria and abducted three employees. The incident has forced Shell to shut in 12,000 b/d in production.” Civil unrest and violence in the oil-rich Niger River delta have shut in 600,000-800,000 b/d of crude production, industry sources report.
The January crude contract fell to $62.21/bbl Dec. 18 as traders focused on forecasts of warmer-than-normal weather over most of the US, but it expired at $63.15/bbl Dec. 19 in expectation that US crude inventories would fall for the fourth consecutive week. The Energy Information Administration reported Dec. 20 a 6.3 million bbl plunge in commercial US crude stocks to 329.1 million bbl in the week ended Dec. 15. Gasoline inventories jumped by 1 million bbl to 200.9 million bbl in the same period. Distillate fuel stocks rose by 1.2 million bbl to 133.1 million bbl.
“Over the past 2 months, the US oil data have shown a consistent pattern of rapid tightening with the total inventory overhang having eroded dramatically and with the fall tilted toward gasoline stocks, which now exhibits a deficit of 6.2 million bbl relative to their 5-year average,” said analysts at Barclay’s Capital, the investment banking division of Barclays Bank PLC, London.
(Online Dec. 22, 2006; author’s e-mail: [email protected])
