OPEC's weak ray of hope

David Knott
London
[email protected]

Reports suggest some members of the Organization of Petroleum Exporting Countries regret increasing production quotas in November.

Since its ministerial meeting in Jakarta, when OPEC hiked total quotas to 27.5 million b/d of oil from 25.033 million b/d, oil prices have fallen more than $2/bbl (OGJ, Dec. 8, 1997, p. 21).

London's Centre for Global Energy Studies (CGES) said the Saudi-instigated increase in OPEC's quotas now looks like an even greater miscalculation than it seemed in mid-December.

"Like the Asian financial crisis," said CGES, "the oil market is threatened with a price meltdown, but unlike the Asian situation, there is little immediate relief in sight for oil.

"Matters could get much worse before they get better. Iraqi barrels are finally being lifted again at Ceyhan and will put pressure on the sour crude market in the Mediterranean.

"Meanwhile, refinery turnarounds have begun in the U.S., incremental oil demand has apparently vanished in the Far East, and a mild winter in Europe is adding to the gloom. Rumors of an OPEC meeting next week offer the only ray of light."

OPEC meeting

An OPEC spokesman confirmed there will be a meeting, but the organization portrays it in less dramatic terms than rumor-mongers.

The meeting will take place in Vienna on Jan. 26, but it will be only of the Ministerial Monitoring Committee, comprising OPEC Sec. Gen. Rilwanu Lukman and the energy ministers of Iran, Nigeria, and Kuwait.

The meeting was apparently brought forward from Mar. 16, but the spokesman said quota compliance will be the main subject on the agenda, not the production quota total.

"There will inevitably be some discussion of the market," said the OPEC official, " but the purpose of the meeting will be to discuss quota compliance.

"The committee can only make recommendations to ministers, even on quota compliance, and cannot effect decisions. Changes to the production quotas cannot be made short of calling a full meeting of the ministers."

What's ahead

CGES says non-OPEC oil producers will not respond to falls in the oil price, unless it plunges well below $10/bbl and stays there.

"With prompt Brent persisting below $15/bbl," said CGES, "there is some stripper well output in the Lower 48 states that will be shut in, possibly as much as 200,000 b/d. As for the rest, there is no chance of cutbacks."

CGES said market fundamentals suggest that OPEC will have to reduce its output below 27.5 million b/d to see the oil price return to $17/bbl this year. This is thought unlikely.

"The best that can be expected," said CGES, "is that OPEC somehow reduces production to 27.5 million b/d for as long as possible and to wait for the positive price feedback effects on oil demand to work through."

If OPEC reduces output below 27.5 million b/d, CGES predicts Brent crude for prompt delivery will average $15.70/bbl in the first quarter, $13.60/bbl in the second, $12.90/bbl in the third, and $13.70/bbl in the fourth.

If OPEC maintains current output, CGES foresees an average prompt Brent crude price of $15.50/bbl in the first quarter, $12.80/bbl in the second, $10.70/bbl in the third, and $9.60/bbl in the fourth.