Market watch: Prices fall as traders snub Russian pledge to cut output

Energy futures prices fell Wednesday as traders ignored Russia's announcement that it now plans to reduce its oil exports by 150,000 b/d in January.

By the OGJ Online Staff

HOUSTON, Dec. 6 -- Energy futures prices fell Wednesday as traders ignored Russia's announcement that it now plans to reduce its oil exports by 150,000 b/d in January.

That makes it more likely that the Organization of Petroleum Exporting Countries will keep its promise to cut production quotas by 1.5 million b/d in the new year, provided non-OPEC members reduce their output by 500,000 b/d, said Robert Mabro, director of the Oxford Institute for Energy Studies, at an energy symposium Wednesday in Houston sponsored by Arthur Andersen LLP.

"But what really matters is the mood of the market," Mabro said. "As long as world demand for oil is seen to be flat or falling, the market probably will be bearish."

Russia originally proposed a cut of 30,000 b/d, which it later increased to 50,000 b/d. Its latest proposed reduction amounts to 5.2% of Russia's oil exports (OGJ Online, Dec. 5, 2001), but is only half as large as the 300,000 b/d rollback that OPEC had requested from that country.

Norway meanwhile had said it would reduce its production by 100,000-200,000 b/d, but industry sources now suggest that country may only match Russia's reduction. Mexico has promised a cut of 100,000 b/d, while Oman said it would roll back 40,000 b/d. Angola also indicated its willingness to cooperate in curbing production, although it has not say by how much. That could still leave non-OPEC reductions short of the amount stipulated by OPEC.

OPEC Sec. Gen. Alí Rodríguez Araque welcomed Russia's decision Wednesday, but reiterated his warning that world oil prices will collapse in the second quarter of 2002 unless all major oil producers are committed "for the duration needed" to stabilize the market.

"Nobody can predict exactly what effect the recession will have on global demand for oil, but with demand customarily falling off in the second quarter, it is imperative to be prepared. And that means acting now," Rodríguez said. "The problems we are facing are very real and are not going to go away by themselves."

Energy prices fell on the New York Mercantile Exchange as traders focused on demand declines signaled by a bearish report of US petroleum inventories issued by the American Petroleum Institute late Tuesday.

The January contract for benchmark US light, sweet crudes dropped 16¢ to $19.49/bbl while the February contract lost 17¢ to $19.84/bbl. However, both contracts recovered somewhat in after-hours electronic trading to $19.59/bbl and $19.94/bbl, respectively.

Home heating oil for January delivery fell 1.04¢ to 53.14¢/gal Wednesday on the NYMEX. Unleaded gasoline for the same month was down 0.83¢ to 54.2¢/gal. The January natural gas contract gave up 7.2¢ to $2.49/Mcf.

In London, Russia's announcement seemed at first to boost North Sea Brent oil futures prices on the International Petroleum Exchange, prior to an aggressive selloff in the late afternoon. The January Brent crude contract closed at $19.22/bbl, down 7¢ for the day after trading as high as $20.25/bbl earlier Wednesday.

Brokers said traders in that market doubted that Russia's privately owned oil companies can keep their promise to reduce exports and not be tempted to maximize sales.

Russia has expanded its oil production over the last 2 years to more than 7 million b/d, with some 3 million b/d being exported. Russia's oil exports normally dip during its harsh winter months as more of its crude is refined into petroleum products for the domestic market.

Meanwhile, the January natural gas contract gained 3.9¢ to the equivalent of $3.80/Mcf on the IPE.

The average price for OPEC's basket of seven crudes also gained 9¢ to $18.29/bbl Wednesday.

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