Markets await evidence of OPEC cutbacks

Crude oil prices were holding relatively steady last week, as markets awaited firm evidence of production cutbacks promised by several countries. Following a surprise agreement between Mexico, Venezuela, and Saudi Arabia to cut output beginning Apr. 1, members of the Organization of Petroleum Exporting Countries (OPEC) plus Russia and Norway followed suit (OGJ, Apr. 6, 1998, p. 35). Between them, OPEC plus the non-OPEC countries slated cutbacks amounting to more than 1.6 million b/d, although

April 20, 1998

4 min read

Crude oil prices were holding relatively steady last week, as markets awaited firm evidence of production cutbacks promised by several countries.

Following a surprise agreement between Mexico, Venezuela, and Saudi Arabia to cut output beginning Apr. 1, members of the Organization of Petroleum Exporting Countries (OPEC) plus Russia and Norway followed suit (OGJ, Apr. 6, 1998, p. 35).

Between them, OPEC plus the non-OPEC countries slated cutbacks amounting to more than 1.6 million b/d, although market reaction has been largely skeptical.

Having plunged almost to $11/bbl before the cutback pledges, Brent crude oil for prompt delivery closed in London trading on Apr. 14 at $13.14/bbl, while Brent for May delivery closed at $13.64/bbl.

Too early to tell

One report doing the rounds in crude markets suggested that the International Energy Agency (IEA), Paris, had announced that less crude oil was being produced globally following the agreement.

IEA denied this, saying that its last monthly market report included calculations about likely oil production, but that the report was published at the end of March, ahead of the cutback agreement's start date.

An IEA official said, "We said that if all the countries which have engaged to reduce production do so by as much as they said, because there is a production overhang of 3 million b/d, the cutbacks would not be enough."

An OPEC official said that members submit production figures at the end of each month. Its most recently available figures are for March, and figures revealing production cutbacks will not be available until the end of April.

As of Apr. 15, OPEC had received March production figures from only seven members: Algeria averaged 906,000 b/d of oil produced, Iran 3.925 million b/d, Iraq 1.223 million b/d, Kuwait 2.196 million b/d, Nigeria 1.947 million b/d, Qatar 709,000 b/d, and U.A.E. 2.479 million b/d.

Several of these figures are higher than the March production figures estimated by Middle East Economic Survey (MEES), which reported that OPEC's total output for March averaged 28.82 million b/d (see table).

Cutback plans

The main parties to the production-cutback agreement have been disclosing details of their plans for achieving reduction targets, though Iraq announced it intends to boost output.

Petroleos de Venezuela SA (Pdvsa) announced on Apr. 8 that it had cut production by 200,000 b/d from 3.37 million b/d starting Apr. 1, in line with its cutbacks pledge.

Last week the OPEC News Agency (Opecna) reported that Pdvsa had notified some of its clients of its planned production decreases.

"It is expected that the reduction of Venezuela's production will be extended through the end of 1998," said Pdvsa Vice-Pres. Eduardo Blanco, "which is why clientsellipsewere notified of the new volumes of supply in some types of curde."

Blanco also said all levels of Pdvsa's production and marketing units had been given instructions regarding the production cuts.

Petroleos Mexicanos (Pemex) released a schedule for oil exports in second quarter 1998. This pegged total export volumes at 1.744 million b/d for the period, compared with an average 1.927 million b/d exported in March.

Saudi Arabia and Kuwait meanwhile instructed Japan's Arabian Oil Co. (AOC), which produces oil in the neutral zone between the two countries, to reduce its output from the area by 6% beginning Apr. 1, from 310,000 b/d.

This forced reduction is expected to be additional to a 3.4% reduction by Saudi Arabia and a 5.7% reduction by Kuwait, promised at the recent OPEC meeting.

Russia reportedly announced on Apr. 8 an agreement with its major producers to cut crude oil exports by 61,000 b/d and refined products exports by 35-40,000 b/d. However, a senior Russian government official quoted by Reuters said the cuts were not likely to be introduced until the beginning of the third quarter, since the second quarter was already under way.

Norway agreed to cut production by 100,000 b/d, with reduction demanded by the government across its 36 oil fields. Norway's government said production cuts would be implemented after Apr. 12.

Meanwhile MEES reported that Iraq plans to increase its lifting nominations by 360,000 b/d for April, to boost exports of oil under the food-for-aid agreement with the United Nations to 1.58 million b/d for the month.

Julian Lee, oil analyst at London's Centre for Global Energy Studies, said the first real signs of any reduction in global production will not appear until the end of April.

"Various people are claiming they have put cutbacks into effect," said Lee, "but there is nothing very tangible so far. Crude oil traders seem to be waiting for concrete evidence of cutbacks, and until then there is not expected to be any dramatic change in prices."