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Opec prepares to cut output
By David Buchan and Robert Shrimsley
Published: November 19 2000 16:55GMT | Last Updated: November 20 2000 01:12GMT
Opec oil producers indicated on Sunday that their next likely change in output would be a cut, despite US-led calls from consuming nations for increased supply to bring prices down.
But the tone of a meeting in Riyadh at the weekend, bringing together ministers from 40 producing and consuming countries including Opec, the US, the European Union and Japan, was surprisingly unconfrontational, given that oil prices remain at more than $30 a barrel.
At the seventh meeting of the International Energy Forum in the Saudi capital, producing and consuming countries refrained from pushing their respective cases too hard.
Ali Rodriguez, Opec's current president and Venezuelan oil minister, said the cartel's analysis was that world supply exceeded demand of 76m barrels per day by 1.4m bpd, that global stocks of crude and refined products now reached 80 days worth of consumption, and that when these stocks reached 90 days level prices would start to fall. So Opec was poised to start cutting output back at its next meeting in mid-January.
Ali al-Naimi, oil minister of Saudi Arabia, Opec's dominant producer, stressed the issue for the January meeting was production cuts. That was, he told the Middle East Economic Survey, "the reason for not putting any additional crude supply on the market now, because then you risk creating a swell and consequently the need for a bigger cutback".
He added that there would be a "phantom" quality to any cutbacks next year simply because not all Opec countries had really increased output over the last year by as much as they claimed. Saudi Arabia could, he said, raise production by 1.8m pbd in a 90-day period to help fill any sudden supply shortage, such as cutbacks by Iraq.
Bill Richardson, US energy secretary, told Opec of Washington's "strong preference for a range of $20 to $25 a barrel". Significantly, however, he said he did not use a bilateral meeting with his Saudi counterpart to call for output rises.
Mr al-Naimi claimed the Riyadh conference ended with "no big difference" on prices, with Opec's proclaimed target of $22-$28 a barrel not far above the US preference.
The Riyadh meeting showed "the era of confrontation between producers and consumers is over", claimed Mr Richardson, who was this weekend the first US energy secretary to attend such a conclave with the Opec cartel. One of the reasons for US participation, Mr Richardson had made clear, was to foster a climate of co-operation that would, at a time of renewed Israeli-Palestinian conflict, deter Arab oil producers from thinking of using "the oil weapon" as they did in 1973.
Saudi Arabia has proposed a permanent secretariat for the International Energy Forum, which meets only occasionally at ministerial level with its next session set for 2002 in Tokyo. Mr Richardson said the US would study the idea, which was welcomed in principle by Helen Liddell, the British energy minister who attended the meeting.
-- (M@rket.trends), November 20, 2000
BUSINESSWEEK ONLINE : NOVEMBER 27, 2000 ISSUE
The Alan Greenspan of OPEC?
Saudi Arabia's oil minister, Ali I. al-Naimi, was clearly enjoying his weekend in Vienna for the OPEC meeting that ended Nov. 13. And why not? With prices stuck in the low-to-mid 30s, Saudi Arabia and the other OPEC countries are having their best financial years in two decades. Saudi Arabia alone is likely to earn $89 billion this year from oil.
To guarantee those profitable revenues, OPEC is contemplating production cuts to make sure prices don't drop too sharply. Sure, Naimi says, he would eventually like to pilot OPEC in for a smooth landing at the $25-a-barrel level. But for now, OPEC is in wait-and- see mode. ''We have already made four increases,'' Naimi says. ''Indications are that inventories are going to build very fast.''
Naimi is trying to be a kind of Alan Greenspan of the oil market, hoping to stabilize prices by matching supply to global demand and growth. Saudi Arabia is the only country with significant enough spare production to play that role. So even though he's worried that $30 per barrel will slow the world economy, killing demand for oil, he would prefer to err on the side of higher prices than oversupply. It was only two years ago that crude prices hovered in the low teens and Saudi oil earnings plunged below $40 billion.
NO PLUNGE. That may seem odd to Western consumers still facing high gas and fuel oil prices; U.S. inventories of crude and refined products remain very tight. Indeed, on Nov. 15, U.S. Energy Secretary Bill Richardson was in London warning that ''crude and heating oil inventories remain alarmingly, stubbornly low.''
But the OPEC ministers meeting in Vienna made it clear that increasingly, they are more worried about the potential for a glut. Their main fear is that the 3.7 million barrels of production they have added in the past few months will swamp the markets. OPEC's ministers even scheduled a follow-up meeting for Jan. 17 in case production cuts are quickly needed. ''The key thing on OPEC minds right now is making sure there is no precipitous fall in prices next year,'' says Raad Aldadiri, an analyst at Petroleum Finance Co. in Washington.
The cartel's current projections indicate that global supply and demand are in fairly close tune. Longer term, traders seem to agree prices will fall as supply overtakes demand. The futures market sees an average of about $25.50 per barrel next year from a current $34.88 for West Texas Intermediate crude.
So why haven't production hikes brought prices down already? Naimi insists that current pricing results from factors OPEC can't control-- refining bottlenecks in the U.S., in particular. And to some extent, he has a point. Although U.S. crude inventories are now some 6% below last fall's levels, U.S. refineries are running flat out. They couldn't make use of greater supply. A major reason: Since 1980 the U.S. oil industry has cut refining capacity by 5%.
Moreover, some OPEC insiders are beginning to doubt that $30-per- barrel oil is so poisonous for the world economy. ''Even at a price of $30, we see demand growing,'' says a Saudi economist.
BAD GUESS. The danger is that Naimi and his colleagues will get things badly wrong. While OPEC worries about a hypothetical glut next year, consumers remain vulnerable to unusually cold weather this winter or political shocks in the Middle East. Either could quickly lead to more price spikes.
But if OPEC is losing any sleep over these concerns, there was no sign of it in Vienna. That may yet come. High prices will eventually lead to more efforts by the U.S. and others to find new, non-OPEC crude reserves. And even if high prices don't send the world into recession, they'll drag down economic growth, cutting demand for OPEC oil. The question is which trend is likely to hit first.
By Stanley Reed in Vienna, with Chris Palmeri in Los Angeles
-- (M@rket.trends), November 20, 2000.