WATCHING THE WORLD AN OPEC TRADING HOUSE

With Roger Vielvoye from London Success of the futures and forward markets and failure of the Organization of Petroleum Exporting Countries to achieve its crude oil price targets are constant sources of irritation to many members of the exporters' club. Production quotas have been a dismal failure. And only once in the past 5 years have OPEC minimum price targets been achieved for any length of time--in the aftermath of Iraq's invasion of Kuwait.

Sept. 30, 1991

3 min read

Success of the futures and forward markets and failure of the Organization of Petroleum Exporting Countries to achieve its crude oil price targets are constant sources of irritation to many members of the exporters' club.

Production quotas have been a dismal failure. And only once in the past 5 years have OPEC minimum price targets been achieved for any length of time--in the aftermath of Iraq's invasion of Kuwait.

Nordine Ait-Laoussine, Algeria's new energy minister, wants OPEC to conduct a fundamental reappraisal of its position. He has put forward his ideas on crude oil price mechanisms that would be more responsive to the market of the 1990s.

PRICE RANGE

OPEC's minimum reference price, currently $21/bbl, would be replaced with a range, perhaps $20-22/bbl. Ait-Laoussine told the annual Oxford Energy Seminar a range is needed because short term fluctuations in the supply/demand balance are too great to fine tune quotas to achieve a specific price.

Maintaining prices in that range would be the role for a new OPEC trading house offering for sale about 2 million b/d or 10% of OPEC's estimated exports during a rolling period of perhaps 12 months.

Million barrel contracts would be tradeable. The price would be published daily, then used as a basis for the valuation of member countries' total exports.

At present, most OPEC prices are based on Brent, West Texas intermediate, Oman, Dubai, and Alaskan North Slope prices. OPEC members say those prices contain a speculative element injected by the presence of commodity traders in the market.

Ait-Laoussine said the OPEC trading house would need an efficient delivery system to give the operation credibility. There also would be a constant need to match buyer and seller to exclude any speculative element from the system.

Like many in OPEC, Ait-Laoussine is concerned at the not so invisible hands of short term speculators and vested interests with a formidable interest in controlling the market.

However, the key to assuring that the OPEC trading house kept prices within the agreed OPEC range would be its ability to intervene when the trading price moved outside preset levels. This would be achieved either by "buying in" contracts or by releasing more crude.

PRODUCTION PLAN

OPEC's production plan would remain in place. Quarterly changes in ceilings and quotas would be made by the OPEC ministerial monitoring committee. Overall the trading house concept would provide OPEC with a better understanding of the global industry's view of the supply/demand balance and would certainly give the organization a rapid insight into the sometimes invisible changes in global production and consumption.

Ait-Laoussine acknowledges that setting up an OPEC trading house would not be simple. But in the past 10 years the industry has witnessed development of powerful, sophisticated trading instruments. The intellectual horsepower is available to devise and develop the system once OPEC has clearly spelled out the task.