OPEC surprises by agreeing to larger-than-expected cuts

• OPEC's total promised production cuts [49,007 bytes]

As news of the deal reached oil markets, crude prices fell slightly, with traders balancing up positions taken ahead of the meeting. But analysts are convinced the cuts will be enough to remove excess stocks by yearend.

As OPEC oil ministers gathered in Vienna for their June 24 meeting, analysts expected them to agree to cut only 0.8-1 million b/d (OGJ, June 15, 1998, p. 19).

Instead, OPEC announced on the evening of June 24 that they would take a further 1.355 million b/d off their combined output, in addition to their earlier pledge to cut 1.245 million b/d.

OPEC said the latest agreement would bring its total promised cutbacks to 2.6 million b/d, based on February OPEC production figures provided by selected secondary sources and not by OPEC members (see table).

The new agreement is effective July 1 and valid for 1 year. OPEC member Iraq is not included, because its oil exports are governed by the United Nations oil-for-aid deal.

OPEC also expressed its appreciation of reductions pledged by non-OPEC members since March. These total more than 500,000 b/d and bring output withdrawn from the market to more than 3.1 million b/d.

Among non-OPEC cutback partners are: Mexico, which has promised a 200,000 b/d reduction; Russia, which has promised 100,000 b/d; and Oman, which has vowed 50,000 b/d. Officials from these countries joined the June 24 meeting as observers.

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Geoff Pyne, oil market analyst at SBC Warburg Dillon Read, London, said OPEC had produced a "very good result," doing enough to make possible a recovery of prices to more than $16/bbl for prompt Brent by yearend.

"OPEC has set a plausible limit-one that, with reasonable compliance, will absorb the oil stocks overhang by the end of 1998," said Pyne. "Crude oil prices won't rise in the short term because of the stock overhang, but it is hard to imagine that OPEC could have done anything better in the circumstances."

Pyne said countries inside and outside OPEC that have promised production cuts have a huge commitment to making the deal work: "They are scared stiff-always the best motivation."

Middle East Economic Survey (MEES), on the other hand, warned that adherence to the earlier cutbacks agreements has so far been patchy.

"The reduction in crude oil output," said MEES, "by the 10 OPEC members who were party to the Riyadh/Vienna agreements amounted to 722,000 b/d in April and 1.007 million b/d in May, representing 58% and 88%, respectively, of the 1.245 million b/d for which commitment was made."

Manouchehr Takin, senior upstream energy analyst at London's Centre for Global Energy Studies, agreed that the stock overhang would prevent prices rising in the short term, keeping prompt Brent in the $13-14/bbl band for the next few months. But Takin expects Brent prices to reach $14-15/bbl by yearend.

Unusually, the OPEC ministers did not open their meeting at 10.00 a.m. but held a private session to iron out a plan. Although they did not convene until late afternoon, the agreement was concluded quickly. One official said this showed that the ministers had "done their homework" ahead of the deal.

OPEC will hold its next meeting of energy ministers in Vienna on Nov. 25, 1998.

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