OPEC expected to cut output
By Myra P. Saefong, <a href=cbs.marketwatch.com>CBS.MarketWatch.com Last Update: 10:44 AM ET April 23, 2003
VIENNA (CBS.MW) -- The Organization of Petroleum Exporting Countries is expected to vote on a production cut at its meeting this Thursday, but whether it's a cut in actual production or output quotas remains in question.
"The upcoming OPEC meeting is very tough to call because there are so many unknown variables at this time," said Todd Hultman, president of Dailyfutures.com, a commodity information provider.
OPEC's decision on production, if any, will largely weigh on what it believes will happen with Iraq's oil and that's a pretty risky bet. See Due Diligence on Iraqi oil.
U.S. Central Command has said Iraq's southern oil fields could be pumping 800,000 barrels per day in five to eight weeks, while the northern fields could be at 800,000 barrels per day within one to five weeks. Iraq produced around 2.5 million barrels per day and exported around 2 million barrels per day under sanctions imposed by the United Nations after the 1991 Gulf War.
But some analysts have disputed estimates that Iraqi production could be back online in a matter of weeks. See related story.
Either way, OPEC officials can't afford to ignore the potential oil flow from Iraq, whose proven crude-oil reserves stand at some 112 billion barrels -- second to only Saudi Arabia's 263 billion barrels in proven oil reserves.
"Iraq eventually will have a good influence with OPEC," said Jeff Mokychic, head analyst at Bridgeton Global Investor Services, noting that several OPEC officials have emphasized the need for Iraq to remain a member of the cartel.
That of course begs the question of who will be recognized as the legal representative for Iraq.
Venezuela and Nigeria factor in
And if OPEC's plate wasn't already full enough, it's still working to balance supply and demand in the face of reduced production from Venezuela and Nigeria as the result of political strife.
OPEC President Abdullah bin Hamad al-Attiyah has said the market is oversupplied by around 2 million barrels per day.
OPEC believes part of that glut comes from "the return of much of Venezuela's production on top of the increases in Saudi production," said Thorsten Fischer, an oil economist at Economy.com.
Additionally, Nigerian production, which had been cut by as much as 800,000 barrels a day from 2.2 million barrels at the height of the nation's civil war, is now down by around 300,000 barrels with many oil companies resuming operations.
Remember too, that OPEC members are "notorious for cheating," said Kevin Kerr, a financial analyst at Weiss Research. "Nigeria and Venezuela will be likely to continue to pump oil at full force to catch up with losses due to their respective problems over the last few months, he said.
Taking a guess
Given all the issues OPEC has to deal with, analysts can only guess at what the cartel will do on Thursday.
Economy.com's Fischer expects members to agree to "realign quotas and actual production."
But with Iraq's production coming on quickly and the Energy Department reporting that crude inventories rose 9 million barrels last week, Dailyfutures.com's Hultman predicts OPEC will agree to a 2 million-barrel cut in its official quota of 24.5 million barrels per day, excluding Iraq. See Futures Movers for more.
"You can be sure that their full attention will be on the OPEC basket price in the days ahead and that they will respond quickly with more cuts if crude prices fall near the $22 per barrel lower limit of the target range," he said.
Joshua Sadler, vice president at the energy trading desk at Societe Generale in New York also expects "OPEC to announce its intention to reign in overproduction, currently running about 2 million barrels per day, but not to agree to the quota cut which Iran is advocating."
He warned, however, that investors expecting decisive action at the meeting will likely be disappointed, "triggering a collapse in confidence and prices." Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.
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