OPEC may cut flow of crude further

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OPEC may cut flow of crude further

March 15, 2001


LONDON--OPEC oil ministers are widely expected to agree to cut crude oil production by 2 percent or more when they meet later this week in a bid to shore up prices amid sagging demand.

A report issued Wednesday by the International Energy Agency is likely to reinforce arguments for a cutback, with the IEA making what it called an "alarming" downward adjustment to its earlier estimate for the growth in global oil demand this year.

The Organization of Petroleum Exporting Countries pumps about 40 percent of the world's oil. Its ministers are to meet Friday in Vienna, Austria, to assess current market conditions.

Their decision will affect the prices consumers in the United States and other importing nations pay for gasoline and heating oil.

Spring is historically a time of weak demand for crude, and OPEC anticipated an ebb in consumption when its members approved a 1.5 million barrel-a-day cut in their production quota in January.

Since then, the IEA noted a further softening in demand due to an economic slowdown in North America, an unexpectedly mild winter in major oil-consuming countries and the impact high oil prices have had on consumption.

As a result, many energy analysts now anticipate that OPEC ministers will decide to trim an additional 500,000 barrels a day from the cartel's official output. Some analysts predict a cut of twice this amount.

"That, I think, is what the market expects," said Mehdi Varzi, a senior oil analyst at the investment bank Dresdner Kleinwort Benson.

Yet despite its revised outlook for demand, the IEA stressed that global inventories of oil and refined products are now at their lowest level relative to demand since 1991.

The Paris-based agency added that oil markets have yet to digest the effects of OPEC's last round of production cuts, which took effect Feb. 1.

"It would be misleading and premature to conclude that supply is running ahead of demand or that markets are in imminent danger of weakness," it said in its monthly energy report.


-- Doris (nocents@bellsout.net), March 16, 2001



Friday, 16 March, 2001, 14:56 GMT Opec agrees oil cuts

Oil ministers have discussed their policies ahead of the official Vienna meeting The Opec cartel of oil producing countries has agreed to cut its production in an attempt to drive up prices.

However, the organisation's secretary general Ali Rodriguez said on Friday afternoon that the exact size of the cut was still disputed - contradicting earlier statements from Opec officials.

Opec sources suggest that the cut could weigh in at between 800,000 and one million barrels a day.

The meeting at Opec's headquarters in Vienna is now expected to last well into the night, and might continue on Saturday morning.

The production cut comes despite warnings by analysts and Western governments that a large reduction in oil supply could cause a world recession, with both industry and consumers suffering under higher prices.

Some oil ministers had demanded a cut as large as 1.5 million barrels a day, but Opec countries had come under huge political pressure from the United States and others not to go that far.

"Opec would be cutting its own throat [if they go for such a large cut]," Alamo's energy consultant Falah Aljibury said.

Cheap oil

Oil prices remain relatively low, despite the prospect of a cut in world crude supplies.

"The market has been wrestled out of control by global economic circumstances," said PIRA energy consultant Gary Ross.

A barrel of London Brent blend crude recovered a modest 27 cents on Thursday to $24.20 a barrel having shed $1.90 over the two previous days.

While in New York, crude oil due for delivery in April rose 14 cents to $26.50 a barrel after similar losses earlier this week.

Plummeting stock markets around the world and slow economic growth in the US have been blamed for the relatively low oil prices.

And the modest price gains on Thursday may be seen as simply mirroring the modest recovery seen in the stock markets.

Oil prices have fallen more than 25% since touching a 10-year high above $35 a barrel late last year.

Striking a balance

Opec aims to maintain world oil prices at about $25 per barrel for its reference basket of seven different types of crude oil.

Although a barrel of Brent crude is close to Opec's target price, the organisation's basket of different oils fell to $23.55 on Thursday, close to the bottom of the group's preferred $22-$28 target range.

The reference basket price stood at $23.55 a barrel on Wednesday, not far from the bottom limit of the target range.

If the price rises too far above the range, Opec seeks to increase production.

If it falls too far below it, production is cut, as it did in January when output was slashed by 1.5 million barrels per day.

With the US economic slowdown, however, the cartel has to be careful not to damage wider economic growth.

If it is too aggressive in protecting oil revenues, it risks choking consumption of crude oil.

Generally, increases in industrial production have boosted demand for energy.

Demand is faltering

The fall in prices also tallies with a monthly report on growth in demand for oil by the International Energy Agency (IEA) in Paris.

The agency said that growth in demand is faltering as the US economic slowdown takes its toll on emerging economies.

IEA, which represents industrialised nations, revised down its projection for growth in demand this year by 111,000 barrels per day to 1.41 million barrels per day.

"Demand has weakened due to a milder than anticipated winter, a sluggish North American economy and price effects," said the IEA.

The agency has revised downwards its projections for 2001 several times.

Price falls and slowing demand fly in the face of low oil supplies.

Oil is a finite resource which could eventually run out. Opec says its reserves are sufficient to last another 80 years at the current rate of production.

The IEA said on Wednesday that demand during the winter was smaller than expected, despite oil inventories remaining low by historical standards.

And as we enter spring, demand will fall even further.

-- Rachel Gibson (rgibson@hotmail.com), March 16, 2001.

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