OPEC defers output hike, now considering a cut

Nov. 20, 2000
The Organization of Petroleum Exporting Countries has deferred a decision on any further oil production increases until January.

The Organization of Petroleum Exporting Countries has deferred a decision on any further oil production increases until January.

At its ministerial meeting in Vienna last week, the 11-nation organization continued to wrestle with the question of how production adjustments might steady the oil price within the desired $22-28/bbl range.

Output change approaches

OPEC did not change its price band mechanism, which uses a "basket" of seven OPEC member crude prices as a benchmark for making production adjustments to keep oil prices within the target range.

But several delegates, including Qatar's Minister of Energy and Industry Abdullah Bin Hamad Al-Attiyah, confirmed that the mechanism would now be activated "manually" rather than automatically.

Al-Attiyah said after an informal meeting Nov. 12 that OPEC would have to be "very careful" in making its next move to modify output levels. "We have to be balanced," he stated. "Increases are easy, cuts are more difficult."

Saudi Arabia's Minister of Petroleum and Mineral Resources A* I. Naimi said production modifications should be delayed when it "takes time to assess what has been done already." That sentiment was shared by many OPEC delegates.

Fears of an oil price collapse in the second quarter of 2001, when demand drops at the end of winter, appeared to be foremost on ministers' minds. Debate turned to the timing of a production cut.

That-coupled with the disputed effectiveness of OPEC's attempts this year to bring the oil price down below $30/bbl through output hikes-raised the prospect that the organization's price band mechanism, which triggered a 500,000 b/d hike on Oct. 31, would be suspended altogether.

Supply-demand outlook

The International Energy Agency has forecast that global oil demand will drop from 78.4 million b/d currently to 77.7 million b/d in the first quarter and 75.6 million b/d in the second.

"Demand will rise more than 2 million b/d to an average 77.9 million b/d over the fourth and first quarters, during the Northern Hemisphere winter, before dropping a similar amount between the first and second quarters of next year," IEA said in its latest monthly oil market report.

After four production increases this year, OPEC continues to blame the world's persistently volatile oil prices on factors unrelated to crude supply-especially market speculation, as well as refinery and shipping bottlenecks (see Watching the World, this page).

The London-based Centre for Global Energy Studies (CGES) argues that OPEC's "actual" production increases explain the negligible downward movement of the oil price this year.

On paper, OPEC has placed an additional 3.7 million b/d on the market this year, but CGES Senior Analyst Leo Drollas said this figure might be something closer to 1.5 million b/d.

Drollas calculates OPEC will have to slash its collective output by 1 million b/d, starting in March, to avert a price crash.

New leadership

Meanwhile, Venezuela's Alí Rodríguez Araque was named to succeed Rilwanu Lukman as OPEC's next secretary general.

Rodríguez, Venezuela's Minister of Energy and Mines and the current OPEC president, will begin his 3-year term on Jan. 1. Algeria's energy and mines minister, Chakib Khelil, becomes president.

The appointment of Rodríguez, the "architect" of OPEC's price band mechanism, came as a surprise to industry observers (see related story, p. 38).

Leading contenders for the job were thought to have been Saudi Arabia's Suleiman Jasir Al-Herbish, Iraq's Abdul Amir Al-Anbari, and Iran's Tahmaseb Mazaheri Khorzani.