OPEC calling the shots--Cartel control stabilizes prices, confuses some

HoustonChronicle.com April 25, 2003, 3:59PM By DARRIN SCHLEGEL

RESOURCES • Graphic: Controlling the flowOPEC members sought to stabilize falling crude prices Thursday by announcing big production cuts while simultaneously -- and surprisingly -- upping output limits.

The move befuddled some analysts, but for one day, at least, it had its desired effect.

Crude prices dropped more than $1 after the agreement was reached in Vienna, Austria, but recovered and closed down only 1 cent.

Nevertheless, the decision didn't erase skepticism about whether the cartel of big oil producers curbed production enough to avert a supply glut.

"I think it's going to soften prices," Deutsche Bank energy analyst Jay Saunders said.

The Organization of the Petroleum Exporting Countries, which supplies a third of the world's oil, said it will monitor its decision and gauge its impact when it meets again June 11.

"We feel we may need another cut in June," OPEC President Abdullah bin Hamad Al-Attiyah told the Associated Press. "We will watch the market very carefully."

OPEC stepped up its production of crude when war in Iraq threatened to disrupt global supplies at a time when inventories were dangerously low. Supplies had been depleted by the near-cutoff of exports from Venezuela because of the general strike there.

Those shortages didn't happen, and the quick end to the fight left a surplus.

In addition, slow worldwide demand has caused prices to drop from nearly $40 a barrel in late February to the $26 range.

That is near the range that OPEC wants to keep prices, having said its stated goal is to remain in the midrange of $22 to $28 per barrel.

But because of the surplus production, which members feared could cause a further price drop, and the resumption of Iraqi oil exports possibly as soon as June, the cartel met in an emergency session Thursday.

The group emerged saying it would trim 2 million barrels per day from its average production estimate of 27.4 million barrels per day in February and March.

But observers weren't completely buying it.

For one thing, the size of the cut seemed inflated because most other estimates pegged its production at 26.2 million barrels per day.

Observers also noted that OPEC lifted output quotas by 900,000 barrels per day, to 25.4 million, in the agreement taking effect June 1.

"They are trying to create the impression that there is a cutback, but in effect it is a very, very small cutback," said Matthew Cordaro, director of the center for management analysis at Long Island University. "It keeps them ahead of the impact that increased Iraqi supplies would have down the line."

OPEC members on Thursday said they want Iraq to remain part of the 11-member group.

Iraq, which stopped exporting oil after U.S.-led forces invaded the country on March 19, was producing 2.5 million barrels per day in February.

Crude oil for June delivery fell 1 cent to $26.64 a barrel Thursday on the New York Mercantile Exchange, the lowest price since Nov. 26. Prices rebounded in the last half hour of trading after plunging as much as 3.9 percent to $25.61.

For now, consumers can expect gasoline prices to remain stable as the busy summer driving season begins, analysts said, meaning they won't rise much, but neither will they decline a lot.

In Houston, motorists are paying an average of $1.47 for a gallon of unleaded gasoline, down from $1.61 a month ago.

The gasoline price index from the Department of Energy predicts a slow decline in fuel prices through the summer as refiners catch up with crude declines.

Bruce Cavella, an oil industry analyst with economic consulting firm Global Insight, said gasoline prices could spike at times in May and June because inventories are lower than usual and demand is fairly robust.

Refiners, however, should be able to replenish stocks in time for peak demand, he said.

"That's important because later on this year it will enable prices to stabilize or be a little bit lower than where they are now," Cavella said.

Unleaded gasoline for May at the New York Mercantile Exchange settled up 3.12 cents at 87.93 cents a gallon.

"For now, it's business as usual, and the oil-consuming nations are benefiting from that," Cordaro said.