OPEC faces dilemma in Vienna meeting

Sept. 19, 2005
Going into their Sept. 19 meeting, OPEC members were under heavy pressure to raise their production ceiling.

Sam Fletcher
Senior Writer

Members of the Organization of Petroleum Exporting Countries faced a dilemma at their Sept. 19 meeting in Vienna as to whether to raise their production quota in an act of political expediency or to take no action in a market where high prices seemed to be reducing demand.

Going into that meeting, OPEC members were under heavy pressure—especially from UK officials—to raise their production ceiling. Markets were anticipating an increase of 500,000 b/d to 28.5 million b/d.

In his opening statement, OPEC Conference Pres. Ahmad Fahad Al-Ahmad Al-Sabah, also energy minister for Kuwait, said members would examine the situation carefully to determine what additional measures may be taken to help stabilize the market and moderate prices "at reasonable and sustainable levels."

However, he said, "It is important that our market-stabilization efforts receive the full support of non-OPEC producers in order to be as effective as possible." Officials from seven non-OPEC oil-producing countries attended the meeting, including Angola, Egypt, Mexico, Oman, Russia, Sudan, and Syria. No decision was announced by press time Sept. 19.

"We think that OPEC has now accepted and is willing to defend a floor for oil prices that is equivalent to $50/bbl for West Texas Intermediate," said analysts in the Houston office of Raymond James & Associates Inc.

They cited "three key reasons OPEC is now willing to defend this higher oil price target: (1) There has been little evidence of oil demand destruction at $50 oil; (2) the decline in the US dollar vis-à-vis the euro has weakened OPEC's purchasing power; and (3) the oil market and the equity markets are becoming much more comfortable with the concept of $50 oil than many had believed 1-2 years ago."

SPR crude
In mid-September, however, the US Department of Energy approved bids for the sale of 11 million bbl of the 30 million bbl of crude offered from the Strategic Petroleum Reserve to US oil companies in a move to blunt the spike in energy prices in the wake of Hurricane Katrina.

The fact that there were no takers for 19 million bbl, the majority of the crude offered, confirmed that "the key issue remains inadequate global refining capacity," rather than a shortage of crude, said Robert Morris, Banc of America Securities LLC, New York.

Paul Horsnell of Barclays Capital Inc. in London said, "The problem that the market faces is not one of crude oil availability but is instead all about oil product availability. That was the problem faced before Katrina, and that was the problem that was exacerbated by Katrina."

In a Sept. 14 report, Horsnell noted, "Oil product prices continued to fall back faster than crude oil, despite the underlying fundamentals of a market with excess crude and a shortage of products, facing refinery constraints and heavy government releases of crude oil."

The SPR crude offered by DOE was divided equally into 15 million bbl of sweet crude and 15 million bbl of sour crude. But refiners submitted adequate bids for 10.8 million bbl of sweet crude and only 200,000 bbl of sour crude.

"The remaining spare OPEC capacity is heavy, sour barrels," Horsnell said. "There is nothing magical that differentiates those barrels significantly from the 14.8 million bbl of sour [crude] that did not receive commercial-enough bids in the [DOE] auction. If anything, the OPEC barrels are less useful as they are further from the market. That does raise the question of why there is pressure on OPEC to unleash extra heavy sour barrels on a market [that] clearly does not want them."

DOE officials said four Gulf Coast refineries remained shut down Sept. 16, including Chevron Corp.'s 325,000 b/d unit in Pascagoula, Miss.; ConocoPhillips's 247,000 b/d facility at Belle Chasse, La.; ExxonMobil Corp.'s 187,000 b/d Chalmette, La., refinery; and Murphy Oil Corp.'s 125,000 b/d refinery at Meraux, La. Officials expect those units to be slow in coming back on stream.

"Downing four significant refineries in a system which was already overstretched and in which demand is not collapsing must reduce product inventories," Horsnell said. "Likewise, ultimately there has to be upward pressure on crude oil inventories. Refinery runs have fallen more than crude output, and SPR barrels will move out of government-held inventories into commercial inventories. So at some point very soon we would expect product cracks, and gasoline cracks in particular, to manifest some more attractive entry points as the overdone move to the downside based on demand pessimism runs out of steam."

(Online Sept. 19, 2005; author's e-mail: [email protected])