Latest production cuts 'not enough'

The oil ministers of Saudi Arabia, Venezuela, and Mexico agreed in Amsterdam on June 4 to a second reduction in combined crude oil exports. The ministers agreed to cut output by a total 450,000 b/d from an unspecified date and called for additional production cuts by countries inside and outside the Organization of Petroleum Exporting Countries (OPEC). As news of the deal spread, crude oil prices rallied strongly. In London trading, Brent crude oil for prompt delivery rose 73¢/bbl on June

June 15, 1998

3 min read

The oil ministers of Saudi Arabia, Venezuela, and Mexico agreed in Amsterdam on June 4 to a second reduction in combined crude oil exports.

The ministers agreed to cut output by a total 450,000 b/d from an unspecified date and called for additional production cuts by countries inside and outside the Organization of Petroleum Exporting Countries (OPEC).

As news of the deal spread, crude oil prices rallied strongly. In London trading, Brent crude oil for prompt delivery rose 73¢/bbl on June 4 to close at $13.95/bbl, while Brent for July delivery rose 51¢ to close at $14.64/bbl.

The latest agreement was additional to the ground-breaking deal between the three countries in March, which led to cooperation between OPEC and non-OPEC producers to stop an oil price free-fall (OGJ, Mar. 30, 1998, p. 22).

Following the Amsterdam agreement, Venezuela's Ministry of Energy & Mines issued a statement noting that, despite the March cutback agreement, the market was still unbalanced.

"Inventories need to be reduced," said the ministry, "to provide the market with the balance and acceptable price levels for the health of the world economy, ensuring a sustained growth of the oil industry.

"With that aim, the oil ministers of Saudi Arabia, Mexico, and Venezuela agreed that their countries will contribute with an additional reduction of 450,000 b/d, distributed as follows: Saudi Arabia 225,000 b/d, Venezuela 125,000 b/d, and Mexico 100,000 b/d."

Further cuts

The three countries said they planned to consult other oil exporters, both OPEC and non-OPEC countries, with a view to contributing to further export reductions.

Julian Lee, oil analyst at the Centre for Global Energy Studies, London, said the additional cutbacks were "...not before time, but still not enough."

Lee said Saudi Oil Minister Ali Al-Naimi was trying to drum up support for further production cuts among other OPEC ministers ahead of the planned OPEC ministerial meeting in Vienna on June 24.

"Producers need to cut at least another 500,000 b/d," said Lee, "but we don't know how much support for further cuts there is within OPEC. Outside OPEC, Norway is cool on further reductions, while Russia would only shut in non-economical production."

Lee reckons OPEC will probably "manage to cobble together" a further agreement in Vienna that will lead to additional cuts. Kuwait, the U.A.E., and possibly Iran are thought to be most likely to agree to reduce output further, but additional combined reduction is not expected to satisfy markets.

"Crude markets will weaken if OPEC doesn't get a decent agreement in Vienna," said Lee, "but they are already expecting cuts. Markets rallied when these latest cuts were announced, but prices have fallen back again, and there is a general feeling that 450,000 b/d is not enough."

Arnstein Wigestrand, vice-president for crude oil and NGL trading at Saga Petroleum AS, Oslo, said the new Saudi/Mexico/Venezuela agreement was a good sign and would be the big issue at the Vienna OPEC meeting.

"But my feeling," said Wigestrand, "is that OPEC will definitely have to cut more if it wants higher oil prices. Even if they cut twice as much, it will be some time before the oil price will go up again.

"The problem is that storage tanks are full. Even for a further 1 million b/d cut it would be months before you saw a significant reaction in prompt oil prices, though you may see an earlier reaction on the forward curve."