MARKET WATCHOil futures prices inch up as OPEC mulls possible production cuts

Sam Fletcher
Senior Writer

HOUSTON, Apr. 9 -- Oil futures prices increased slightly Tuesday with reports that the Organization of Petroleum Exporting Countries might reduce production to protect against a threatened oil glut.

The average price for OPEC's basket of seven benchmark crudes increased by 42¢ to $25.33/bbl Tuesday, near the center of its targeted price range of $22-28/bbl. OPEC members generally would be happy to maintain oil prices at that level; they certainly would not want to see oil prices fall below their targeted range.

But although world oil production currently is higher than normal, compared with demand, analysts said, commercial stocks of oil and petroleum products remain unusually low.

Venezuela remains a factor
"The disruptions in Venezuela (by the Dec. 2-Feb. 3 general strike) removed more oil from the world market than the (current) cessation of Iraqi exports and did much to push up oil prices and deplete US inventories. Barring further disruptions, we should see oil prices continue to ease as demand decreases with the end of the winter in the Northern Hemisphere and as large volumes of stepped up production from other countries reaches our shores," said Daniel Yergin, chairman of Cambridge Energy Research Associates, in testimony Tuesday at a US Senate subcommittee hearing on energy security issues.

Earlier this week, Alí Rodríguez Araque, president of Petroleos de Venezuela SA, said that company might lift the rest of its force majeure restrictions on petroleum product exports as soon as the 940,000 b/d Paraguana refinery complex facility's 60,000 b/d flexi coker unit is restarted, probably by Apr. 18.

PDVSA already has lifted force majeure restrictions on crude oil and some products, according to reports by Petroleumworld, a Caracas-based online oil newsletter. It quoted Rodríguez as saying PDVSA's oil production should average 3.1 million b/d this year.

Non-OPEC production
Yergin noted that 70% of the oil consumed in the US is either produced in this country or imported "from our neighbors in the Western Hemisphere." Another 20% comes from West Africa and the North Sea. The US now imports more than half of the oil it consumes, he said, up from 36% at the time of the 1973 oil embargo.

"One of the most noteworthy features since the 1970s is the significant growth in non-OPEC production," said Yergin. "As a result, the Persian Gulf's share of (world) production has declined from 40% to under 30%. Most noteworthy is the 35% decline in output in Iran over the last 25 years and the 20% decline in capacity in Iraq between 1990 and 2002."

Meanwhile, he said, "The first major increase in world oil reserves since the mid-1980s" has been "almost completely overlooked." That increase of some 175 billion bbl resulted from technological advances that cut development and production costs "almost in half" and moved the huge oil sands deposits in Canada's Alberta province "into the economically recoverable proven reserves column," said Yergin.

"This is a great deal of oil—50% more than Iraq's proven reserves and two thirds those of Saudi Arabia's," he said. "Canada will become a much more significant producer—moving from 3 million b/d in 2003 to 4.5 million b/d in 2010—led by the oil sands from Alberta and, to a lesser extent, from eastern Canada's offshore (operations)."

CERA officials foresee "significant growth in world oil supplies over this decade—measured in terms of additions to capacity, on the order of a 20-25%-plus increase." Major growth areas, in addition to Canada, will include Russia, the Caspian region, West Africa, Latin America, and the deepwater US Gulf of Mexico.

However, Yergin said, "The largest growth, at least at this point, looks to be in the Middle East. On present estimates, Middle East capacity is expected to increase by about 7 million b/d—more growth than in any other region. But Russia and the Caspian will be very close."

Tuesday's prices
The May contract for US benchmark light, sweet crudes inched up 4¢ to $28/bbl Tuesday on the New York Mercantile Exchange. The June position gained 22¢ to $26.73/bbl. Heating oil for May delivery rose 0.16¢ to 71.8¢/gal. But unleaded gasoline dropped 0.41¢ to 83.84¢ gal.

The May natural gas contract lost 2.6¢ to $5.11/Mcf on NYMEX. "Deals traded in a tight range most of the day, with no real direction motivating the slight gains and losses," analysts said Wednesday at Enerfax Daily. "Concerns about sagging production levels and near-record low storage continue to temper the bears heading into the typically weak spring demand period."

Analysts noted, "The current cold weather and low natural gas inventory scenario is supporting prices on the one hand, but builds into storage ahead of the traditional injection are putting pressure on prices on the other, thus the choppy trading. Until more serious summer demand appears, things will remain choppy for the next couple of weeks at least."

In London, the May contract for North Sea Brent oil increased by 2¢ to $24.60/bbl on the International Petroleum Exchange. That lagged a 2.1¢ increase on the May natural gas contract to the equivalent of $2.59/Mcf on IPE.

Contact Sam Fletcher at [email protected]