The Organization of Petroleum Exporting Countries has set off in pursuit of a $21/bbl crude oil reference price, $3/bbl more than the old reference price that was beyond reach for most of this year.
How close the 13 members come to their immediate goal will depend on how closely they observe the organization's new production ceiling of 22.491 million b/d agreed on at OPEC's July 27 ministerial meeting.
Oil prices on world markets rose in response to the agreement in Geneva, then jumped further in reaction to last week's invasion of Kuwait by Iraq (see Newsletter).
While Iraq's aggressive stance captured headlines before and after the meeting, it was lengthy negotiations that led to the compromise on the new reference price.
Iraq went into the meeting demanding a $25/bbl reference prices which could have been achieved only by substantial cuts in production.
Other producers were prepared to concede an increase in the reference price.
Data provided by Saladin Computer Systems, London, show that OPEC's reference price, based on a basket of crudes, fell to about $14/bbl late in June, then kept recovering as July progressed.
OPEC OIL PRODUCTION
The new ceiling will remain in force until the end of the year. It has been increased from 22.086 million b/d to allow the U.A.E. to increase its quota to 1.5 million b/d, at par with Kuwait.
There are forecasts that OPEC production will drop to about 22.5 million b/d in the short term from the latest official reported flow of 24.113 million b/d in April. Unofficial sources said OPEC production slipped to about 23.25 million b/d in June and July.
Most of the expected cut likely will occur in the U.A.E. and Kuwait.
Memories of Iraq's anger at the depressed level of Middle East prices resulting from quota busting by Kuwait and the U.A.E., backed up by Iraq's military excursion across the Iraq-Kuwait border, will provide the impetus to restrain liftings for the remainder of the third quarter, market sources said.
The testing time for OPEC will come in the final 3 months of the year when demand for OPEC crude could rise to more than 24.5 million b/d. In the past, OPEC discipline tended to evaporate as producers with spare capacity found it difficult to resist the temptation to sell additional oil cargoes at high prices.
EXPANDED MONITORING
OPEC's ministerial monitoring committee is to play an expanded role during the rest of the year.
As well as its normal task of watching for quota violations by member countries, the committee will monitor oil price movements. The aim, OPEC said, is to ensure that oil "retains its position as the prime global energy source and that no structural change is taking place in favor of alternative sources of energy."
Persuading the world that OPEC will not return to the soaring prices of the 1970s and early 1980s is important to the organization.
The final communique from the Geneva meeting indicated the kind of action that will be taken at the next ministerial meeting if the reference price tops $21/bbl: The reference price and production ceiling will be increased proportionally.
And when a higher production ceiling is being decided, the increase will be redistributed among countries with spare production capacity, breaking away from the previous principle that every OPEC member should defend its agreed share of total OPEC flow.
This opens the way for big producers of the Persian Gulf, Africa, and Venezuela to progressively increase their total share of OPEC production.
The Geneva meeting took this principle one step further by saying in the final communique that if a member country cannot fully produce its allocation, the unproduced portion will be shared among exporters with spare productive capacity.
All members will be required to submit details of production within 7 days after the end of each month.
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