Price fall, Saudi row follow OPEC meeting

David Knott
Senior Editor

The crucial June 24 meeting of Organization of Petroleum Exporting Countries (OPEC) oil ministers has been followed by a fall in crude oil prices and Saudi criticism of fellow members.

The fall in prices was expected, as the market is still awash with crude oil and the full effects of additional cuts of 1.355 million b/d, taking OPEC's total promised cutbacks to 2.6 million b/d, are not expected to be felt for 3 months.

But an unusually forthright briefing of journalists in Vienna after the OPEC meeting, by Saudi Arabia's Oil Minister Ali Ibrahim Naimi, has renewed speculation about the potential demise of OPEC.

Saudi view

Naimi told reporters he did not think compliance with the production cuts would be 100% and that cheating on agreed output levels would mean producers are unlikely to take 3 million b/d out of the market as planned (OGJ, June 29, 1998, p. 28).

Naimi also said the existing OPEC quota system, in which 11 member countries agree on a production total and individual national quotas, is outdated.

In its place, Naimi envisions a new "ad hoc group" of seven to nine oil exporting countries prepared to undertake "benign intervention" in global oil markets, but he did not specify which countries he would like it to contain.

Naimi said, "It has always been necessary to manage the market in one way or another, and we could do it in this way. This would not be an institutionalized organization like OPEC, but more of a group of free-thinking people looking after their own national interests, doing the right thing at the right time."

His comments follow a number of meetings recently between energy ministers of OPEC members Saudi Arabia and Venezuela and non-member Mexico, which inspired the recent round of production cuts. Other non-OPEC countries, including Russia, Oman, and Norway, have also pledged cuts.

Skepticism voiced

Leo Drollas, chief economist of London's Centre for Global Energy Studies (CGES), said that Naimi's comments reflect the Saudi government's views, but he contends that the ideas for a new alliance are wishful thinking.

"The Saudis are obviously dissatisfied with the traditional OPEC ways," said Drollas, "which involve set meetings, the attentions of the press, and market expectations of OPEC.

"The Saudis are tired of these performances. Saudi Arabia has found a soul mate in Mexico, but how much countries such as Mexico and Russia can help is a different matter."

Drollas said Mexico and Venezuela could be useful partners for Saudi Arabia, since both governments have state oil firms and so can "call their tune."

"Saudi Arabia, Mexico, and Venezuela are all big exporters to the U.S.," said Drollas. "They are sharing out the U.S. market, but they don't want to compete.

"Naimi's vision of a new era dawning is all pie-in-the-sky stuff. In reality, they are all together in a dance of death because of the stock overhang. The last thing they want to do is compete-otherwise oil could fall back to $10/bbl."

Price drop

Meanwhile, the price for dated Brent crude oil dropped from $13-14/bbl at the time of the OPEC meeting to close at $11.94/bbl for dated Brent and $13.44 for August delivery Brent in London trading on June 30.

Drollas attributed the price fall to clearing out of positions taken before the meeting, and said the pressure on oil prices was still downwards, because nothing has changed in market fundamentals.

"It will be mid-August by the time the effects of cutbacks are noticed," said Drollas. "The physical market is still awash with oil, and futures prices have no reason to rise at the moment.

"New trends will appear as news of stocks changes. We think the oil price will recover, but the main issue will be compliance. The market is skeptical, and it is 3 months before evidence of compliance will appear."

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