OPEC STANDS PAT, SPURRING OIL PRICE PLUNGE
The Organization of Petroleum Exporting Countries' insistence on standing pat on production levels at its Nov. 2 'D-24 meeting in Vienna has sent crude oil prices plummeting to their lowest levels in several years.
The latest meeting resulted in an agreement to maintain OPEC's overall production quota at 24.52 million b/d, a 6 month ceiling established at the group's September ministerial meeting. With traders expecting some sort of production cut to reflect the current soft market, oil prices went into a freefall after the November meeting.
Although the September accord was deemed a success at the time, weaker than expected demand, greater than expected Russian oil exports, worries over Iraq's crude exports returning to market soon, and continued strong North Sea production have undermined OPEC's best efforts. As of late last week, oil prices generally had fallen about $3/bbl from the September meeting up until the November meeting. OPEC's disclosure that it would not cut production, coupled with fresh worries over Iraqi oil exports restarting, triggered the latest price fall.
Analysts were looking for at least a modest cut to reflect OPEC's concern about an oversupplied market. OPEC ministers recently were rebuffed in their calls for non-OPEC crude exporting countries to share in production cuts to bolster prices.
The lack of action by OPEC reflects an apparent gamble that seasonal rising demand will take up the slack in the market, thus buoying prices. But oil analysts generally see the winter jump in demand as doing little more than maintaining flat prices. Some analysts even warn that if no production cuts are forthcoming, oil prices may be headed for another collapse.
Such fears have prompted small U.S. producers to revive their call for Washington to implement protectionist measures. The National Stripper Well Association last week called on President Clinton to establish an emergency oil price floor to protect U.S. producers.
PRICE FREEFALL
Brent crude for January delivery stood at $14.24/bbl at close of trading Nov. 29, having bottomed at $13.97 during the day. That is the lowest level in more than 5 years, when Brent for next month delivery closed at $14.25/bbl Nov. 30, 1988. Before the OPEC meeting, Brent for January delivery had reached $15.87/bbl, having recovered from $15.23/bbl 2 weeks earlier (OGJ, Nov. 15, Newsletter).
On the New York Mercantile Exchange (Nymex), light sweet crude for January delivery dropped $1.07 Nov. 29 to close at $15.31/bbl. That is the lowest since a Nymex West Texas intermediate next month delivery close of $15.10/bbl June 10, 1990, an 18 month low at the time.
An OPEC official said ministers had considered the option of falling oil prices if they maintained September's 6 month quota agreement. Sticking to the agreement was seen as the best route, the official said, adding, "We have to give it time to work out."
Press reports quoted Kuwaiti Oil Minister Ali Al-Baghli as saying he expects an emergency OPEC ministerial meeting to be called if oil prices slide further.
PRESSURE ON PRICES
Meanwhile, added pressure on prices came from reports Iraq was prepared to accept long term U.N. monitoring of its weapons factories.
Monitoring of armaments factories is a prerequisite for resuming Iraqi oil exports. OPEC has a long standing agreement to accommodate Iraqi production within its quota system when the U.N. allows Iraq to resume oil exports. It remains mainly concerned that market instability is influenced by forces outside its control.
"Achieving price objectives and stability of the market are international responsibilities," OPEC said after the meeting. "The conference does not consider that OPEC alone should continue to bear the burden of balancing supply and demand and believes that all producers should join in this effort."
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