Oil price hits new low as OPEC squabbles

David Knott
Senior Editor

The outcome of the meeting of Organization of Petroleum Exporting Countries oil ministers in Vienna on Nov. 25 has taken the oil industry by surprise.

While few expected any great price-reviving agreement from the meeting, even fewer anticipated that OPEC ministers would decide on virtually nothing. The ministers agreed that, henceforth, its twice-yearly meeting would take place in March and September, rather than in June and November, with the next meeting in Vienna Mar. 23. And that was it. Most analysts expected OPEC to agree to extend its current production agreement to yearend 1999, and the failure to agree even to this was seen as evidence of divided views over how to act. Geoff Pyne, oil market analyst at SBC Warburg Dillon Read, London, said that the decision to do nothing except reschedule major biannual meetings was supposed to send a more pro-active signal to the market than a simple extension.

"However," said Pyne, "it did not succeed in hiding acrimony between members. Several, including Algeria , Libya, Kuwait, Nigeria, and Iran, were unhappy that new cuts could not be instigated immediately, and the dispute between them and Saudi Arabia will send negative signals to the market, despite the attempted spin on likely action in March.

"Saudi Arabia said, outside the meeting, that it is not opposed to more reductions but feels-despite low prices-that this is not an appropriate time for them. It wants to ensure compliance first, and perhaps also to allow extra time for low prices to stimulate more favorable market forces."

Immediately after the OPEC meeting, oil futures prices fell to a record low. Dated Brent crude closed at $9.89/bbl in London trading on Nov. 30, while January delivery Brent plunged to $10.29/bbl. At one point on Dec. 1, January Brent reportedly hit $10.22/bbl in London trading, but by close of business that day it had recovered to $10.42/bbl while dated Brent stood at $9.82/bbl. January Brent closed at $10.36/bbl Dec. 2.

Pyne said that Saudi Arabia has solid economic justification for delaying new cuts: "A further month or so of low prices will help to concentrate the minds of Iran and Venezuela, and allow time for Venezuelan elections."

Pyne believes that published data do not show any huge turn for the worse in the supply/demand balance over recent months. Atlantic basin stock levels peaked in May, he said, and have since been "on hold" at high levels.

"Yet even if stocks begin to draw in December," said Pyne, "our supply/ demand analysis suggests that the overhang will be only halved during the first quarter of 1999.

"Against this background, poor market sentiment and uncertainty over future OPEC policy now seem likely to keep prices bumping along in a low range, with Brent futures at $9-12/bbl, at least into the early part of next year."