OPEC quota hike triggers oil price drop

OPEC Production, Quotas [58,492 bytes]

The Organization of Petroleum Exporting Countries (OPEC) has raised its production quotas by almost 10%, triggering a fall in crude oil prices.

The group disclosed on Nov. 29, during its ministerial meeting in Jakarta, that total output quotas from members will be raised to 27.5 million b/d for 6 months beginning Jan. 1, 1998 (see table, this page).

Brent crude oil for January delivery fell $1.05/bbl to $17.95/bbl on the news from OPEC, despite the fact that OPEC has already been producing more than 28 million b/d, well above its recent 25.033 million b/d quota total.

January Brent recovered a little to close at $18.19/bbl in London trading on Dec. 2. One U.K. analyst said, "Like generals who are always fighting the last war, OPEC ministers are not good at timing."

CGES view

London's Centre for Global Energy Studies (CGES) said four countries were allocated more than they can produce in first quarter 1998: Iran, Libya, Algeria, and Indonesia.

CGES predicts Iran's first quarter 1998 output will average 3.85 million b/d, Libya's 1.45 million b/d, Algeria's 870,000 b/d, and Indonesia's 1.4 million b/d.

Three OPEC countries have been producing well over their quotas and are expected to exceed their new marks: Venezuela's first quarter 1998 output is expected to be 3.3 million b/d, Nigeria's 2.3 million b/d, and Qatar's 660,000 b/d.

Saudi Arabia, Kuwait, and the U.A.E., while recently exceeding their quotas after a long period of strict observation, are expected to match their new quota levels in first quarter 1998.

CGES expects OPEC to produce an average of 971,000 b/d over quota early next year, without taking Iraq into account. If Iraq agrees to extend the oil-for-aid deal with United Nations, OPEC output will reach 28.5 million b/d.

If Iraq resists further oil exports under the U.N. deal, CGES expects OPEC output to average 27.8 million b/d in first quarter 1998.

"The call on OPEC in first quarter 1998 will be around 27.4 million b/d," said CGES, "assuming a normal winter, while the average call on OPEC in the first half of next year is expected to be around 27.1 million b/d.

"Thus, with or without Iraqi oil exports, there is likely to be too much oil from OPEC next year. If Iraq suspends Resolution 986 for the next 4 months, we expect Brent to average $18.80/bbl in first quarter 1998, dropping to $17/bbl in the second quarter and $15/bbl in the third.

"With a smooth renewal of Resolution 986, Brent is expected to average around $18/bbl in first quarter 1998, dropping to $15/bbl in the second quarter and carrying on its decline, which would prompt a crisis in OPEC."