Sam Fletcher
Senior Writer
HOUSTON, Feb. 11 -- Energy prices jumped Tuesday after the Organization of Petroleum Exporting Countries, meeting in Algiers, unexpectedly decided to reduce its production quota by 1 million b/d to 23.5 million b/d of oil, effective Apr. 1, as well as curb its overproduction of 1.5 million b/d.
World energy markets were almost resigned to no production cuts from OPEC. "However, in view of the projected significant supply surplus in the seasonally low demand second quarter, the conference decided that remedial supply responses are needed to maintain market balance and avert downward pressure on oil prices," OPEC News Agency reported (OGJ Online, Jan. 10, 2004). OPEC ministers said they would review world oil markets at their next meeting on Mar. 31 in Vienna. Another extraordinary meeting is scheduled June 3 in Beirut.
Purnomo Yusgiantoro, Indonesia's energy minister and OPEC conference president, defended the cut but said the group remains sensitive to "calls of concern" from the global energy community and fears of "negative political and economic impact" if oil prices exceed OPEC's target of $22-28/bbl "for a long period."
OPEC's basket price has remained above that target since late last year, gaining 66¢ to $28.75/bbl Tuesday after the proposed production cut was announced.
Energy prices
The March contract for benchmark US light, sweet crudes jumped by $1.04 to $33.87/bbl Tuesday on the New York Mercantile Exchange, while the April contract gained 98¢ to $33.01/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., shot up by $1.05 to $33.88/bbl.
Gasoline for March delivery escalated by 4.3¢ to $1.0105/gal Tuesday on NYMEX. Heating oil for the same month rose by 1.84¢ to 89.8¢/gal.
The March natural gas contract gained 5.5¢ to $5.40/Mcf Tuesday, "lifted by a late surge in crude oil, chilly Midwest weather, and colder forecasts for the Northeast next week," said analysts Wednesday at Enerfax Daily.
In London, the March contract for North Sea Brent crude increased by 93¢ to $30.04/Mcf Tuesday on the International Petroleum Exchange. Gas oil for February delivery gained $4 to $253.25/tonne. However, the March natural gas contract dipped by 4.6¢ to the equivalent of $4.01/Mcf on IPE.
OPEC controls markets
"OPEC ministers can say things and make the oil price rise, even without taking any action," noted Frederick P. Leuffer, an analyst with Bear, Stearns & Co. Inc., New York. "We saw this in December when oil ministers took no action on quotas, production, or even the ceremonial election of a secretary general but merely mentioned that the [US] dollar was weak and that this justified a higher oil price. Speculators promptly bid prices higher."
He said, "OPEC's message has been simple and straightforward: It wants oil prices to stay high, at least for now. The question is, will OPEC take action when it is required?"
"OPEC is working on the basis that the market is a pale and sickly creature. We believe that view is seriously misplaced," said Paul Horsnell, head of energy research, Barclays Capital Inc., London. "The market is in rude health and likely to get too boisterous."
Bearish data
Horsnell faulted OPEC ministers for relying on market data from the International Energy Agency, "which is by far the most bearish in terms of the outlook" for the second quarter of this year.
He cited "a systematic and consistent pattern of upward revisions in demand and downward revisions in supply." He said, "On the day of the OPEC meeting, the US Department of Energy increased its forecast of the call on OPEC crude in the second quarter by 800,000 b/d, The day after the meeting, the IEA itself increased its estimate of the second quarter call by 400,000 b/d and for good measure increased [first quarter demand] by 400,000 b/d and [third quarter] by 600,000 b/d."
Horsnell said, "OPEC has at least an extra 2 million b/d of room for maneuver beyond that implied by the IEA. We were confident that there would be a high floor to prices [during the second quarter] even if there were no quota cut and only a very limited reduction of actual output. Given that, we view the OPEC decision as adding a rather superfluous extra floor, as well as skewing second quarter price risks to the upside."
Meanwhile, Leuffer noted, "There is little incentive [for OPEC members] to produce within quota today. Oil prices already are high. A production cutback might drive prices to levels that could harm economic growth and, consequently, reduce oil demand. Higher oil prices could anger oil importing nations such as the US, Germany, Japan, and China. Also, why give up market share now, when OPEC nations realize that inevitably they will have to make room for higher Iraqi output?"
Some analysts claim Iraq may have a hard time maintaining production at the January level of 2 million b/d, however, much less a significant increase. "Assuming no increase in Iraq's production, this would leave a 'call' on [the remaining] OPEC 10 oil of 22.9 million b/d, or 600,000 b/d below the new quota and more than 3.2 million b/d below estimated January production," Leuffer said.
At Cambridge Energy Research Associates annual energy conference Tuesday in Houston, CERA Director James Burkhard cited a convergence of five factors, including OPEC's price defense, that support strong oil prices. The other factors are:
-- Rapid economic growth that is expected to boost world oil demand by 1.3 million b/d in 2004.
-- Constrained Russian export capacity.
-- Slower future growth of Iraqi oil production.
-- Renewed terrorism threats in Saudi Arabia.
Contact Sam Fletcher at [email protected]
