Rally in oil prices ends; Brent drops to less than $18/bbl in London

The recent rally in world oil prices, which briefly took prices on the London International Petroleum Exchange to over $20/bbl, has ended with lower demand sending prices back downwards toward their 2-year low. Brent crude was traded in London Tuesday at $17.91, down 26¢ down overnight.

By the OGJ Online Staff

LONDON, DEC. 11 --The recent rally in world oil prices, which briefly took prices on the London International Petroleum Exchange to over $20/bbl, has ended with lower demand pushing prices down toward their 2-year low.

Brent crude was traded in London Tuesday at $17.91, down 26¢ overnight.

Traders said the main reason for the fall was the readjustment of positions following statistics from the US which show that milder winter weather is reducing demand for home heating oil and that stocks of oil for domestic use at are a 2-year high.

There is also concern about the fragility of the recent agreement between Russia and the Organization of Petroleum Exporting Countries (OPEC) to cut exports to support prices towards the OPEC target of $23/bbl. The present OPEC "basket" price stands at $17.10.

OPEC is waiting to see whether rival producers will meet its demand of cutting 500,000 b/d from world oil supplies before it will confirm its decision to reduce its output targets by 1.5 million b/d.

Russia, the biggest non-OPEC exporter, has agreed to stop pumping 150,000 b/d from Jan. 1, and Mexico has promised a 100,000 b/d cut. Oman and Angola have also said they will rein in supplies without specifying any numbers.

Norway has yet to inform OPEC about the cuts it will make. Norway, the second-biggest independent exporter, has said it will trim between 100,000 and 200,000 b/d. OPEC has always assumed that Norway would adopt the larger output cut, but Norway has said it will decide by Christmas.

Industry analysts also point out that Norway has given itself a loophole if other non-OPEC producers do not make their promised output cuts, and more significantly, the option to revert to full production levels if the OPEC policy has no effect on prices.

The Norwegian Energy Ministry said, "Norway will reduce oil production when other oil producing countries, including OPEC countries, reduce production. Then Norway will decide on the size and the timing of implementing the measures.

"The decision to reduce Norwegian oil production is unilateral. The production regulation measures will be suspended, if other countries do not implement announced measures or if measures do not have the desired effect."

OPEC has predicted that oil demand will fall next year by as much as

300,000 b/d, but other organizations are predicting that demand will rise and that non-OPEC producers will step in to meet that demand if OPEC cuts output.

A senior member of OPEC's research department has prepared a report for the Russian Energy Ministry that predicts average fall in world oil demand during 2002 of 0.4%, equal to 300,000 b/d. This fall will be as high as 900,000 b/d by the end of this year but will recover to only 50,000 b/d by the end of 2002, the report suggests.

However, Julian Lee, a senior analyst at the Center for Global Energy Studies, London, said, "This is an attempt to put pressure on and create a negotiating position with major non-OPEC producers. I don't believe demand will fall next year."

He said International Energy Agency data due to be published Dec. 12 will suggest that oil use has risen in every year since at least 1986 and that 2002 demand will be 600,000 b/d higher than in 2001.

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