Sam Fletcher
Senior Writer
HOUSTON, Oct. 23 -- Having risen in the previous session after Saudi Arabia endorsed a proposed production cut, crude futures prices fell Oct. 20 after the Organization of Petroleum Exporting Countries announced a larger-than-expected reduction of 1.2 million b/d that would lower the 10 affected members' current production to 26.3 million b/d on Nov. 1.
The new production target is 1 million b/d lower than OPEC's actual production in September, but 1.2 million b/d below the 28 million b/d quota that the group set 2 years ago for its 10 members other than Iraq, which is still trying to recover to prewar production levels.
Prices for crude and petroleum products fell Oct. 20 as traders speculated whether all the eligible OPEC members actually would reduce production. "We believe that OPEC will only curtail production by 765,000 b/d. However, the cartel's decision to cut underscores our belief that they are defending oil prices in the low $60/bbl range going forward," said analysts in the Houston office of Raymond James & Associates Inc.
"Only the Saudis immediately specified their exact commitment: a cut of 380,000 b/d, part of their attempt to save the cut's credibility," noted analysts at the Societe Generale (SG) corporate investment-banking group.
"We believe that the Saudis did not like the way this cut was more or less imposed by Nigeria and Venezuela without preliminary discussion with the other members, probably expecting to make good deals by forcing the organization to announce a cut based on official quotas. After all, both Nigeria and Venezuela have long been producing less than their official quotas: 120,000 b/d less for Nigeria and 680,000 b/d less for Venezuela," said SG analysts. "Therefore, if OPEC decided on pro-rata quota cuts totaling 1 million b/d, Nigeria and Venezuela could each have complied with its new official quota by maintaining production and not cutting a single barrel," they said.
"With the OPEC basket still above $50/bbl, members will have a strong incentive to continue producing at high levels," said Rick Mueller, senior analyst at Energy Security Analysis Inc., Boston. "Beyond the potential public relations nightmare of cutting output in the face of high prices, there is a strong economic incentive for countries to maximize their revenue while prices remain strong," he said. "The Saudis in particular will be carefully watching reactions in the futures market and will act quickly to raise production to snuff out any sharp price spike."
In a recent memo to clients, Mueller said. "While crude and product inventories are high at present, this is the usual and necessary state of the market on the verge of heating season." ESAI is forecasting global refinery runs to climb nearly 3 million b/d by December from currently lower demand levels in the shoulder season. "At the same time, the global balance that compares total oil demand to total supply is already forecasting a net deficit of 900,000 b/d in the fourth quarter," ESAI analysts said.
Energy prices
The expiring November contract for benchmark US light, sweet crudes fell $1.68 to a 16-month low of $56.82/bbl Oct. 20 on the New York Mercantile Exchange, wiping out gains from the previous session. The new front-month December contract lost $1.17 to $59.33/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down by $1.68 to $56.83/bbl. Heating oil for November delivery dropped 4.01¢ to $1.68/gal on NYMEX. Unleaded gasoline for the same month declined by 2.22¢ to $1.47/gal.
The November natural gas contract continued to escalate, however, up 10.9¢ to $7.24/MMbtu. "November futures prices rallied 28% last week. . .driven by colder-than-expected weather in the Central US over the last 2 weeks," said Raymond James analysts. Still, they said, "It now seems that we will end the injection season between 3.5-3.6 tcf," up from a record 3.44 tcf at last report.
In London, the December IPE contract for North Sea Brent crude dropped $1.19 to $59.68/bbl. Gas oil for November slipped by $1 to $533.75/tonne.
No price update was available on OPEC's basket of 11 benchmark crudes, since OPEC Secretariat is closed Oct. 23-24 and Oct. 26 for holidays.
Contact Sam Fletcher at [email protected].