OPEC poised to curb production, not quotas
The Globe and Mail By PATRICK BRETHOUR With files from Bloomberg Tuesday, April 22, 2003 - Page B1
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CALGARY -- The Organization of Petroleum Exporting Countries appears set to cut back production -- rather than formal quotas -- at an emergency session Thursday to avoid a glut of oil in the latter half of the year.
Those expectations briefly pushed crude prices above $31 (U.S.) a barrel yesterday.
OPEC essentially abandoned its quota system last month, just before the launch of the U.S.-led war on Iraq, aiming to make up for the loss of more than two million barrels a day in Iraqi exports.
The result was production far beyond the formal quota of 24.5 million b/d established in March for the 10 members of OPEC excluding Iraq. According to estimates by the International Energy Agency, OPEC produced 25.88 million b/d in March, even though output from Venezuela and Nigeria was constricted.
Oil prices have remained buoyant, even with the overproduction., largely because of concerns about how long it will take for Iraq to resume production.
So far, predictions of a sharp decline in postwar oil prices have not materialized.
Crude oil for May delivery rose 32 cents to $30.87 a barrel yesterday on the New York Mercantile Exchange, the highest closing level this month for the benchmark contract. In early trading, it touched $31.08 a barrel.
But with global oil production at its highest level on record, OPEC clearly needs to trim its output for fear of seeing crude inventories rise too quickly, one analyst said. "OPEC is pumping an awful lot of oil," said Steve Thornber of Threadneedle Asset Management in London.
However, analysts said OPEC is unlikely to reduce its production quotas, and will instead focus its attention on bringing actual output into line with those formal targets.
Economic and political pressures will both drive OPEC in that direction, analysts said.
The cartel may paradoxically give a stronger upward push to oil prices -- currently just above its preferred range of $24 to $30 a barrel -- by not cutting quotas, said Kyle Cooper, a Houston-based analyst with Smith Barney.
A quota cut would send the message to the market that OPEC is not committed to reducing output, since a reduction from actual production to a lower quota would be unrealistic, Mr. Cooper said. Conversely, a hint of an intent to lower output to current quota levels will signal that OPEC is serious about reducing surplus production.
Tim Evans, a senior energy analyst at IFR Pegasus in New York, agreed that a reduction in OPEC quotas would not translate into additional cuts in production. Saudi Arabia is responsible for much of the overproduction, and it will take as long as eight weeks to reduce its output to even its current quota, Mr. Evans noted.
Any further reduction would be unlikely to take effect until after the cartel's next meeting in early June, he said. "It would be a cosmetic adjustment."
Global politics will also influence the cartel, Mr. Evans said. Saudi Arabia, particularly, will not want to be seen as taking advantage of the United States in the wake of the war on Iraq by cutting quotas to boost oil prices even more, he said. In contrast, a vague statement of intent to cut back excess production will not be seen as a flagrant insult, he said.
On the other side of the equation, OPEC will need to consider the long-term effect of high prices on its control of the global oil market. At higher prices, non-OPEC producers with higher production costs, such as Russia and Norway, are able to increase their output, leaving the cartel with a smaller share of a larger market.