Market watch: OPEC threatens not to cut output

By the OGJ Online Staff

HOUSTON, Nov. 16 -- The Organization of Petroleum Exporting Countries' refusal to cut output without support, especially from large oil producer Russia, could have disastrous results for the entire market, said Paul Horsnell, head of energy research for JP Morgan Chase & Co. in London.

Plan A was a Jan. 1 output ceiling cut with non-OPEC help. When Russia pledged to cut output by a mere 30,000 b/d, OPEC moved to Plan B: a Mexican standoff.

"Plan B was to hold one's ground, threaten not to cut at all until Russia got serious, and make sure that OPEC does not blink first," said the analyst. Horsnell said that if Russia gives in and pledges to cut more production, everyone will try to forget the present difficulties. But, if Russia refuses, OPEC will refuse to cut any output at all, with possibly disastrous results for the entire market.

"Plan B2 would be a very rough ride indeed. ... In effect it is to repeat the pattern of 1999. Hammer the oil price down far enough (at least as far as $10), and for long enough to see some real damage done to non-OPEC, enjoy increased demand at the bottom of the economic cycle, hasten and reinforce the economic upswing, chasten absolutely everybody involved, demonstrate who is in control, and blame the low prices on Russia," said Horsnell.

"When the time is right, the market is tightened up again, and a strong base is laid. When the tightening comes, prices can rise fairly rapidly," he said.

In the meantime, energy futures prices nosedived in trading on the New York Mercantile Exchange Thursday as the market waited for news as to who would give in first.

The December contract for light, sweet crude fell $2.29 to finish at $17.45/bbl, while the January contract stood at $17.84, down by $2.17.

In after-hours electronic access trading, the December contract was fetching $17.84/bbl and the January contract $18.19, both up from the NYMEX close.

Refined petroleum products also closed lower, with December home heating oil losing 5.03¢ to finish at 51.09¢/gal, while unleaded gasoline for the same month gave back 4.53¢ to rest at 48.84¢/gal.

NYMEX natural gas for December delivery plunged by 12.5¢ to end at $2.55/Mcf.

Undoubtedly, the market got a jolt from the OPEC-Russia standoff. The market had been expecting an announcement of a straight production cut of up to 1.5 million b/d from OPEC after the conference in Vienna on Wednesday.

However, the decision to tie the cut to similar moves by non-OPEC countries has created serious doubts as to whether the output reduction will ever be made.

Most analysts were not hopeful about the willingness of non-OPEC producers to reduce production.

Some observers, however, pointed out that as Jan. 1 was still some way off, at least Russia might be able to work out production curtailment.

Meanwhile, in London Thursday, North Sea Brent crude oil futures slumped to their lowest level for over 2 years on the International Petroleum Exchange on fears that demand would fall rapidly over the next several months.

IPE December Brent futures settled Thursday at $17.68/bbl, down by $1.07 from the previous close. The day's high was $18.80 and the low $16.80.

Brokers said that traders were concerned that it might prove impossible to support prices through production control.

They said the market had not found a bottom in the current price slide, but $15/bbl could prove only temporary support.

Also on the IPE, the December contract for natural gas rose 7¢ to close at the equivalent of $3.47/Mcf.

OPEC's basket of seven crudes stood at $16.19/bbl Thursday, compared with $18.09 the previous day.