OPEC Fails to Follow Pledge to Scale Back Oil Production

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OPEC Fails to Follow Pledge to Scale Back Oil Production

Thursday, April 12, 2001 10:40 PM ET

By Bhushan Bahree

Staff Reporter Of The Wall Street Journal

PARIS -- The Organization of Petroleum Exporting Countries is continuing to produce oil far above its target levels, providing at least some relief to major consuming countries that have low inventories, relatively high prices and once again face the prospect of high gasoline prices as the peak driving season approaches.

Data released by the International Energy Agency in Paris showed the 10 OPEC members that were committed to sharply reducing their oil output scaled back only slightly in March, or by some 120,000 barrels a day, to 25.85 million barrels a day. The total was 650,000 barrels a day higher than the target of 25.2 million barrels a day that OPEC set in January. That was when the group's oil ministers decided at a meeting in Vienna to cut production by 1.5 million barrels a day, effective Feb. 1.

Since then, the ministers have agreed to a further supply reduction of one million barrels a day, effective April 1, lowering their output target to 24.2 million barrels a day. Their aim is to keep crude-oil prices around $25 a barrel as measured by a basket of crude oils. The price of North Sea benchmark Brent Blend is usually about $2 a barrel more than the OPEC basket. The U.S. benchmark West Texas Intermediate usually has an even-larger premium of around $4 a barrel; on the New York Mercantile Exchange Thursday, crude oil for May delivery settled at $28.25 a barrel, up seven cents for the day.

The failure by OPEC members to reduce output in line with their agreements had been anticipated by many in the industry. "There's much less incentive to cut output when prices are at $25 a barrel than when prices are at $10 a barrel," said Julian Lee, senior analyst at London's Centre for Global Energy Studies. "This problem is going to get worse for OPEC." OPEC members' record of compliance with output agreements typically has been best during price crashes.

But Mr. Lee and others in the oil industry figure major consuming nations should be grateful that OPEC's agreement is leaking oil at this time. That's because crude-oil inventories in major consuming countries are low by historical standards, according to data compiled by the IEA. And low inventories prompt market volatility.

Indeed, gasoline markets are widely expected to be tight again this year in the U.S., the IEA noted. It said low inventories of crude oil hamper attempts by refiners to meet peak seasonal demand for such oil products as heating oil and gasoline on both sides of the Atlantic.

Still, the IEA's data provide some hope of relief. Growth in oil demand continues to weaken along with the world economy. Meanwhile, world output of crude oil rose 890,000 barrels a day to 78.21 million barrels a day. More than half of that increase, or about 530,000 barrels, came from Iraq, OPEC's 11th member, which doesn't take part in the group's quota system because its exports are regulated by the United Nations. That pushed OPEC's output, including Iraq, up 410,000 barrels a day to 28.51 million barrels a day.

Most of the remaining oil-output increase in March came from the U.S., where production rose 320,000 barrels to 8.26 million barrels a day.


-- Martin Thompson (mthom1927@aol.com), April 14, 2001

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