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13

OPEC Leaks May Not Cool Prices

OPEC members, including Saudi Arabia, will continue to overshoot their self-assigned production limits even after the April 1 deadline, but they do not expect the move to make much of an impact on the runaway price of crude.

OPEC members, including Saudi Arabia, will continue to overshoot their self-assigned production limits even after the April 1 deadline, but they do not expect the move to make much of an impact on the runaway price of crude.

OPEC insiders have stated that tight US gasoline supplies, geopolitical concerns and big overbought positions built up by futures market speculators have led to crude prices hitting 12-month highs -- not a shortage of OPEC crude oil.

They noted that collective Opec production is averaging close to 28 million barrels per day, including Iraq, which is not bound by a quota, even though the group had promised to slash output by some 1.5 million b/d by Nov. 1 before lowering its production limit another 1 million b/d to 23.5 million b/d from Apr. 1.

Several OPEC ministers said over the weekend that the group would implement the 2.5 million b/d in cuts when the new ceiling comes into effect on Apr. 1, but Opec insiders concede that few, if any, of the 10 quota-bound producers will be sticking to their limits. In February, Opec-10 production was some 1.2 million b/d over the limit, according to some estimates.

It is not surprising that OPEC's more moderate members are keen to reassure major consumers that they are happy to meet any shortfall. A vote last week by the US Senate to divert some 53 million barrels of crude, now destined for the US Strategic Petroleum Reserve (SPR), to the spot market to ease oil prices set off alarm bells in OPEC member countries, even though the measure requires the support of the House of Representatives to become law.

"There will be a cut in April but nowhere near the quota," an OPEC insider said, pointing out that Saudi state oil concern Aramco has informed some contract customers that they would receive smaller volumes. "There is no need to release the SPR because there is no shortage of crude -- and we will make sure of that."

This OPEC source and other Opec officials and delegates from member countries said the Vienna-based organization is as confused about the stubbornly high oil price as the oil analysts who have repeatedly raised their price forecasts. They point to persistently bearish forecasts from the International Energy Agency (IEA) for second-quarter demand for Opec oil.

"Like everyone else, we thought there would be a big price fall in the second quarter and did what we thought we had to do to keep prices from falling," an OPEC official said. "Now it looks like the OPEC forecasts, like the IEA's, were too pessimistic."

But he added that OPEC members would be well advised to "hedge their bets" by continuing to leak barrels onto the market rather than officially changing quotas.

Opec ministers meet again on Mar. 31, although at this stage no one wants to predict what, if anything, the group may decide. Venezuelan Oil Minister Rafael Ramirez told journalists at a gas conference in Cairo on Monday that OPEC may cut the ceiling again when it meets this month, but other OPEC officials say such a cut is unlikely, especially since the group has yet to bring production down to the levels agreed last September, let alone to the even lower ceiling agreed last month.

It may seem a bit perverse to speak about OPEC overproduction when crude futures on the New York Mercantile Exchange are hovering near $37 per barrel, but much of OPEC's crude slate is made up of sour (high-sulfur) grades that must be upgraded to meet the strict specifications required to comply with stringent new US environmental regulations. OPEC members worry about a widening sweet-sour price differential that is being exacerbated by more Iraqi barrels.

"Products are the big problem in the market right now and that is creating ... a big problem [for OPEC ]," a Gulf OPEC delegate said. "There is no tightness in heavy, sour crude but there will be a shortage of sweet crudes to make gasoline. As you know, most of us in OPEC do not make a lot of sweet crude."

With the OPEC basket averaging $30.37 in 2004 as of Mar. 4, well above the group's $22-$28/bbl target, it should come as no surprise that some Opec members are keeping the taps wide open. But given OPEC's oft-expressed concern of a second-quarter demand slump and its equal determination to maximize revenues, market watchers said the group's credibility is on the line even though they disagree about what OPEC needs to do.

"The market is taking what OPEC says these days with a big grain of salt," a New York trader says. "Right now, gasoline shortage talk in the US has bailed them out, but at some point they will have to make good on these cuts."

But Leo Drollas, chief economist at the Centre for Global Energy Studies in London said the market "needs more oil now," warning that the "persistent high crude price will haunt OPEC in the long run."

"OPEC should not take this very short-sided view of maximizing revenue with little concern for what it may mean for demand. Prices at these levels will eventually have a negative impact of global economic growth," Drollas said.

Source : IOD