COMMODITIES: Accord on Cutbacks and OPEC Meeting Boost Oil Prices

By Estrella Gutiérrez Reprint | | Print |

Estrella Gutierrez

CARACAS, Mar 27 1998 (IPS) - Oil prices closed Friday 2.50 dollars higher than last week, a reaction to an agreement among leading oil-producing countries to cut production, which the members of OPEC will formalise at an extraordinary conference next Monday.

Venezuela’s Ministry of Energy reported that the OPEC (Organisation of Petroleum Exporting Countries) basket closed Friday at 14.28 dollars a barrel, while the benchmark Brent Crude closed at 14.85 and the US benchmark West Texas Intermediate (WTI) at 16.80. The Venezuelan export cocktail closed at 13.27 dollars a barrel.

The OPEC basket had closed at 11.80 dollars a barrel last Friday, Brent Crude at 12.30, WTI at 14.30 and the Venezuelan cocktail at 10.80.

The oil ministers of Saudi Arabia and Venezuela, representing the 11 members of OPEC, and of Mexico, on behalf of independent producers, surprised traders last Sunday with a decision to curtail the over-production of oil. The pact will remain in force the rest of the year.

Among independent producers, Egypt, Malaysia and Oman joined the effort agreed on at the Riyadh meeting to cut production by 1.6 to two million barrels per day (bpd) starting on Apr. 1.

But the Norwegian parliament rejected the government’s suggestion to cut production by 100,000 bpd over the next nine months, while Russia announced that it would limit production of petroleum by-products, but not of crude oil.

Nevertheless, the voluntary cutbacks in overall production of crude already total close to 1.6 million bpd, high-level sources with Venezuela’s Energy Ministry said Friday.

Energy Minister Erwin Arrieta said the agreement between OPEC and independent producers, designed to stem the downward slide in prices caused by over-production, was unprecedented in the oil sector, and represented “a new paradigm.”

He stressed that no one expected prices to shoot back up to 1997 levels, when the OPEC basket was worth 18.68 dollars a barrel on average, the WTI 20.56, Brent 19.06 and the Venezuelan cocktail 16.48.

From Jan. 1 to this Friday, the average price of the OPEC barrel stood at 13.32 dollars, that of WTI 15.79, Brent 13.93 and the Venezuelan cocktail 12.07.

But Arrieta added that prices would rise to levels more in line with today’s reality of supply and demand, which had been undermined by speculative and psychological factors.

The minister also hopes the demise of the quota system that has reigned within OPEC since 1983 will be formalised at the extraordinary ministerial-level conference to be held Monday at OPEC headquarters in Vienna.

However, even if its end is not made official – a move that experts say would have a negative effect on the market – the quota system perished with the Riyadh decision, Arrieta maintained.

He pointed out that last Sunday’s agreement was based on the real production levels of each OPEC member, which due to climatic reasons and the Asian crisis will not grow in demand by two million bpd as initially projected, but by around 1.3 million bpd.

In fact, the official quotas assigned to each OPEC member “were not even mentioned in Riyadh,” Arrieta added.

Over the past year, Venezuela has staunchly opposed the OPEC quota system, which in its view had become a useless anachronism, and openly flaunted its quota of 2.6 million bpd by producing 3.4 million bpd this year.

Paradoxically, the question being discussed within OPEC in the runup to Monday’s conference is the rejection by a majority of members to cutbacks by Iran and Indonesia based on their official quotas rather than their real levels of production in the first quarter of 1998.

In January the two OPEC members were assigned quotas above their production potential, which meant they did not actually comply with their quotas. And if their proposal is accepted, they will not have to cut their sales of crude oil at all.

“The case of Iran and Indonesia is an example of how absurd the quota system had become, having lost all link with each country’s real production and export capacity,” Alberto Quiros, a former executive of Venezuela’s state-owned oil company and expert on OPEC, told IPS.

Quiros was a special guest to the Riyadh meeting, and will form part of the Venezuelan delegation to the Vienna conference.

The president of the state-run Petroleos de Venezuela, Luis Giusti, said the calculations on how many bpd should be withdrawn from the market in order to stabilise oil prices included Iraq’s planned increase in exports as of April.

It was reported Thursday in Baghdad that Iraq would ask in Vienna to be allowed to raise production to 2.65 million bpd for the rest of the year, up from the 2.3 million it currently sells, as part of its oil-for-food agreement with the United Nations.