OPEC's Russia gambit success ensures firm oil prices in 2002

If the Organization of Petroleum Exporting Countries' latest Russia gambit succeeds, it will be the last piece of the puzzle that ensures firm oil prices in 2002.

The potential for a market share war between OPEC and Russia-the most dynamic non-OPEC player to appear in the Great Game that is oil geopolitics since Mexico a few years ago-has been the biggest worry for oil markets this year. Even though oil markets dodged a bullet as the year started, when Russia ostensibly backed down-a bit disingenuously, as it turned out-from a confrontation with OPEC, the threat remained. As it became increasingly clear that Russia was just tacitly acknowledging its seasonal logistical constraints with an agreement to cut exports by 150,000 b/d (that would have been the case anyway), oil market observers realized that another such confrontation loomed as the seasonally slack second quarter approached. Not helping the situation was the rampant grumbling by Russia's new giant oil companies and by some government officials in Moscow, who, while neophytes at this game, are proving themselves quite adept at manipulating market movements through soundbite duels.

So now it comes to OPEC, whose members engineered the only real substantive production cuts in the accord with Russia-apart from token contributions from other non-OPEC exporters-arrived this week in Moscow with the visage of market cooperation masking a threat for market share war. But early indications from the meetings are that Russia may extend its production cuts (which would make them "real" this time) through the second quarter. If these early expectations are borne out, then the market share war between OPEC and its powerful new rival will have been averted, just in time for the seasonal uptick in markets in the third quarter.

On the demand side, the verdict is from Alan Greenspan, and it's official: The recession is over. Amid the usual positive economic indicators that would allow the pronouncement of a recovery, there is also a continuing surge in demand for gasoline. All the usual markers-pump prices rising, inventories shrinking, and refinery utilization rising-are showing themselves early.

Part of this trend is due to the fact that many Americans are taking to the roads to take vacations shelved because of the terrorist attacks on the US on Sept. 11, 2001-and more of them are taking autos instead of airliners.

But the other driver of this trend is early hoarding-"prehoarding," if you will-of crude and gasoline stocks as refiners and the rest of the oil world nervously anticipate any US military action against Iraq.

Iraq attack prospects

The latest developments center on the prospects for a US-led (or perhaps a unilateral) attack on Iraq, should this member of what President George W. Bush termed an "axis of evil" refuse to allow UN-sponsored inspections of its capability for developing and producing weapons of mass destruction.

The White House has not relented on its rhetoric but remains careful not to rattle its saber too loudly, for fear of alienating allies-both in Europe and in the Middle East-while the US pursues its campaign against terror.

UN Sec. Gen. Kofi Annan has stepped in, calling for Baghdad to relent on its defiance over inspections. And the pundits divine a slightly less-belligerent tone from the Iraqis on the subject. One such pundit, William Safire, contends that the whispers of rapprochement coming from Baghdad on the subject of allowing the return of UN inspectors plays off of the "wiggle room" that Bush administration rhetoric has allowed Iraq on the question of renewed inspections. Safire opines that it all amounts to another opportunity for Saddam Hussein to play the same kind of delay games, the cat-and-mouse rituals, that marked the previous military inspections regime. He may very well be right, and it's hard not to see that as the Iraqi strategy (Why not? It worked before).

But the Bush administration also is building its rhetorical case as well, this week citing satellite data that confirm that Saddam has converted trucks used to deliver humanitarian aid goods into military vehicles-a clear violation of the sanctions regime.

Perhaps the Bush administration's rhetoric allowing the aforementioned wiggle room is simply a case of giving Saddam enough rope to hang himself, while at the same time being careful not to stomp on certain European, Russian, and Middle Eastern toes too forcefully when their support is need for the antiterror campaign. And just maybe US military action against Iraq really is inevitable.

So who's really bluffing? If you want a good educated guess, just ask a refiner why he's stockpiling all that crude and gasoline at the start of the year's historically weakest quarter for demand.

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Latest Prices as of March 8, 2002