OIL PRICES SLIDE IN RESPONSE TO OPEC'S NEW QUOTA

Roger Vielvoye International Editor World crude oil markets delivered a harsh verdict on the Organization of Petroleum Exporting Countries' attempt to return to a production ceiling backed by individual quotas. A fragile looking 22.982 million b/d compromise ceiling hammered out Feb. 15 after a 4 day ministerial meeting sent crude oil prices tumbling.

Feb. 24, 1992

4 min read

Roger Vielvoye
International Editor

World crude oil markets delivered a harsh verdict on the Organization of Petroleum Exporting Countries' attempt to return to a production ceiling backed by individual quotas.

A fragile looking 22.982 million b/d compromise ceiling hammered out Feb. 15 after a 4 day ministerial meeting sent crude oil prices tumbling.

North Sea Brent Blend fell almost $1/bbl to $17.52/bbl in the first full days of trading after the Geneva meeting. European traders blamed the market response on the limited extent of production cuts and doubts about OPEC's ability to deliver the agreed reductions.

U.S. crude futures prices rebounded sightly after taking a steep plunge in the wake of the OPEC accord. Light sweet futures for March delivery rose 290 to $18.41.bbl at closing Feb. 19 after plunging $1.34 the day before.

On paper, the agreement cuts OPEC's premeeting production level of 24.2 million b/d by 1.218 million b/d. In reality, the best the pact can deliver is a cut of 1.105 million b/d because Saudi Arabia won't allow its production to fall below 8 million b/d - 11 3, 000 b/d more than its designated quota.

In a tight second quarter even 113,000 b/d could tip the balance in the markets. More important is the signal of new OPEC disunity that went out to the world industry.

European markets had been looking for a cut of at least 1.7 million b/d to 22.5 million b/d. OPEC ministers appeared to know what was required to put a brake on falling prices. But as so often has happened, they could not agree on a set of national quotas to allow a disciplined cut in production.

SAUDI STANCE

In Geneva, the quest for a 22.5 million b/d ceiling foundered on Saudi Arabian insistence that its production would not fall below 8 million b/d.

Saudi Oil Minister Hishan Nazer effectively, told the meeting that 22.5 million b/d could be achieved only by allowing Saudi Arabia its 8 million b/d minimum and sharing the remaining 14.5 million b/d among the other members. In the face of Saudi intractability, the 22.5 million b/d target slipped away, leaving ministers to present the unconvincing 22.982 million b/d compromise to the markets.

The 13 members obviously shared the market's trepidation about the effect of a higher than expected production ceiling and scheduled another ministerial meeting Apr. 20 in Vienna.

European traders suggest OPEC won't be able to wait until late April before it makes another attempt to bring some sort of balance to the market. Traders fear the market has entered very dangerous waters.

OPEC members's failure to deliver the cuts agreed in Geneva makes more spectacular price declines possible. On OPEC's record of requiring punitive price plunges to spawn serious attempts to control production levels, there are no guarantees that warnings from the market will prompt exporters to observe the new quotas.

HERE'S WHY

Two factors lie behind the Saudi stance in Geneva.

The first is the belief that quotas must be based on sustainable productive capacity and not on historical production levels.

The Saudis also acknowledge that Iraq cannot indefinitely afford to refuse United Nations terms for resuming exports. They believe that before the end of the year OPEC will need to introduce a new system of quotas that takes Iraqi exports into account.

The failure to agree on 22.5 million b/d ceiling strained relations between Saudi Arabia and Iran. The delegation from Tehran was one of the strongest advocates of sharp production cuts to set prices on a climb toward OPEC's target of a $21/bbl price for a basket of crudes.

In Geneva, Iraq was allocated 505,000 b/d in line with its domestic needs and limited exports by truck to Jordan.

Kuwait was given 812,000 b/d, but later this summer production will start to exceed that level. June production could be about 900,000 b/d with 1.5 million b/d flowing by yearend.

To accommodate increased quotas for Iraq and Kuwait, Saudi Arabia will be asked to make a further production cut, taking its quota even further from the 8.5 million b/d it has been producing consistently through most of 1991. In that case, King Fahd has ruled that a 500,000 b/d cut to 8 million b/d is the most that can be considered.