OPEC's June bug

Questions surrounding global crude production levels seem decidedly less clear-cut for the 10 voting members of the Organization of Petroleum Exporting Countries in the runup to this week's ministerial meeting in Vienna.

Questions surrounding global crude production levels seem decidedly less clear-cut for the 10 voting members of the Organization of Petroleum Exporting Countries in the runup to this week's ministerial meeting in Vienna. Many of the organization's conferences over the last 2 years have been almost faits accomplis, closed-door sessions apparently spent fine-tuning the makeup of output adjustments instead of deciding whether or not to turn the spigot.

Things are different this time around. Having taken on the mantle of global oil "stockholder" by foiling industry attempts to rebuild stocks since 1999, OPEC has leveraged control of the oil price for the remainder of the year.

In doing so, however, it also has to shoulder the yoke of anticipating the market in order to avert setting off another wave of price volatility later this year.

Low gasoline stocks and high product prices in North America cannot legitimately persuade OPEC to raise output, following the organization's repeated avowals that its price target was a stable $25/bbl. At the same time, the potential upward pressure on price from a disruption to exports from Iraq-as it negotiates Phase 10 of its oil-for-aid deal with the United Nations this month-or from high-running Middle East tensions, will be hard for OPEC to read.

Output hike 'unlikely'

OPEC's predicament is spelled out by the London-based Centre for Global Energy Studies when it says it believes the organization is unlikely to increase its output targets at the June meeting-but should. By hiking production by 1 million b/d starting at the beginning of July, stated CGES, crude prices would be steadied at OPEC's target level on a quarterly-average basis.

"Because of the delay between any decision to raise its output and an increase in crude deliveries to refineries, OPEC needs to anticipate price squeezes and act well in advance," said CGES in its latest monthly oil report (see Newsletter, p. 5). "It cannot delay an increase until the start of the fourth quarter, for the longer it waits, the bigger the required output increase will be and the greater the price volatility it will cause.

"Should OPEC continue to react to existing market conditions, it will trigger a repeat of the extreme price volatility we witnessed last year," it noted.

Stock cover repercussions

According to CGES calculations, without an OPEC production hike in June, oil stocks will have to be drawn down during the third quarter by 1 million b/d to meet demand, leaving global stock cover wavering around 82 days-1 day less than at this time last year.

"If it waits until October, OPEC will need to raise output by 3 million b/d to keep Brent price flat in the second half of the year at around $27.50/bbl," said CGES.

The more likely scenario, it reckons, will see OPEC react to price signals sent out by East-West competition for crude in the third quarter with a 1 million b/d increase in September and another of the same volume in November. Together, these output hikes might just rein in dated Brent at under $27/bbl, but that would mean-once again-these increases must be undone during the first half of 2002 to prevent the price "from falling heavily."

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