OPEC to meet, but who's watching? Producers running out of power to stabilize market
cbs.marketwatch.com By Myra P. Saefong, CBS.MarketWatch.com Last Update: 8:33 PM ET March 7, 2003
VIENNA (CBSMW) -- When OPEC meets next week, the countries that produce around 40 percent of the world's oil output will be in a uniquely difficult position if they try to stabilize supplies and prices.
"OPEC has already done most of what it can to maintain price stability," said Jeff Mokychic, head analyst at Bridgeton Global Investor Services. "The market's volatility comes instead from geopolitical fears," he said.
In the past six months, oil futures have risen more than 30 percent and were just shy of $40 a barrel last month -- touching a 12-year high -- as Venezuela's ongoing oil strike and tensions over Iraq dominate the world scene.
That surge came even in the face of OPEC's effort last month to raise its cap on production to 24.5 million barrels a day, up from 23 million barrels.
Indeed, OPEC's output was slightly above that limit in February, but inventories remain at critically low levels, not counting shipments from Iraq, which is barred under sanctions growing out of its invasion of Kuwait in 1990. "OPEC has already done most of what it can to maintain price stability."
Jeff Mokychic, head analyst at Bridgeton Global At the same time, supplies of U.S. crude stand more than 16 percent below their year-ago level, and last month they fell to their lowest level in more than 27 years.
Distillate supplies, which include heating oil, stand at nearly 26 percent below their level of a year ago and gasoline stocks are almost 6 percent lower year over year. See full story.
Saudi Arabia to the rescue
The only country with the power to put a dent in the tight supplies is Saudi Arabia, the world's largest producer, analysts say.
"The truth is, most members are pumping at capacity already," said Kevin Kerr, a financial analyst at Weiss Research. OPEC has precious little room to maneuver no matter what happens in Iraq."
Saudi Arabia is currently producing around 9 million barrels per day, but has surplus capacity of around 1.8 million barrels to potentially bring that total to 10.5 million barrels per day, according to the Energy Department.
But it "would take some time and considerable investment to get to that level," according to Thorsten Fischer, an oil economist at Economy.com,
Saudi Arabia has kept is promise of keeping the oil markets well supplied, with its current output much higher than the 7.96 million barrels per day February quota bestowed on the world's largest oil producers, the Energy Department said recently.
But even with its spare capacity at fewer 2 million barrels per day, it's still the only OPEC member with a significant amount of extra oil available for the market. Crude "could shoot as high as $50, $65, or even $100 in the months ahead."
Kevin Kerr, financial analyst at Weiss Research As the weeks wear on, there will be additional output from Venezuela, another 200,000 barrels per day from the United Arab Emirates and maybe another 500,000 barrels per day from Saudi Arabia, "but that's about it," said Fischer.
Given that Kuwait has already said it will shut down about 700,000 barrels per day as a cautionary measure at the beginning of a war, Fischer doesn't see a significant output hike.
Kerr dared to say: crude could jump "as high as $50, $65, or even $100 in the months ahead," even after surging 59 percent in the past year to near $40 a barrel.
Making up for lost oil
As for the meeting itself Tuesday, analysts agreed that OPEC members will more than likely keep their official production limit at 24.5 million barrels per day.
There will be "a silent agreement," however, that Saudi Arabia will produce about 500,000 barrels per day above its quota of 7.96 million barrels per day, said Fischer -- to make up for the shortfall from Venezuela.
Venezuelan production fell to 300,000 barrels per day at the beginning of December from 2.9 million barrels per day earlier that month when workers went on strike in an attempt to oust President Hugo Chavez.
As a result, almost 50 million barrels of oil from world inventories were removed in December, even after accounting for increased supplies from other OPEC producers and reduced consumption in Venezuela, according to the Energy Department. In January, the world lost another 90 million barrels because of the strike. "The only significant influence OPEC has is how quickly they can stop the slide in prices once the Iraqi situation subsides ... something that appears to be a distant event.
Jeff Mokychic The Energy Department also noted that although Venezuelan production has risen to around 1.2 million barrels per day in early February -- around half its pre-strike level -- the strike among oil workers continues.
So when it's all summed up, actual OPEC member production will be higher, but will either match or fall short of being able to cover for lost oil supplies in the event of a war, according to Fischer.
"The only significant influence OPEC has is how quickly they can stop the slide in prices once the Iraqi situation subsides," said Bridgeton Global's Mokychic -- something that "appears to be a distant event." Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.